A Stimulus by Any Other Name

It's been the same story for months: Unemployment is increasing, even if the rate at which it rises has been slowing. While 9.8 percent of the labor force is actually unemployed, some 17 percent are suffering -- they're out of a job, or they've given up on finding a new one after months of looking, or maybe they are forced to work part-time instead of being fully employed.

It's not that the stimulus bill -- the American Recovery and Reinvestment Act -- isn't working. It is, in fact, working quite well to boost the economy, keep people at work, and reinforce the social safety net that millions of Americans rely on, especially through its extension of unemployment benefits. The Obama administration's decision to champion this bill at the height of its post-election honeymoon should be applauded. Now, the administration needs to extend the best parts of the current stimulus and craft a new package of aid to the states.

The ARRA did have a few shortcomings. For one thing, it was too small: The administration based its funding request on economic projections made in winter 2008 that proved overly optimistic about the severity of the recession and extent of the financial crisis. Also, ARRA was not as well constructed by Congress as it could have been: Tax exemptions, traditionally enacted every year, were included at the expense of funding that states could use at their discretion to plug fiscal holes or investments in things like rural broadband and public health, which have a much stronger positive affect on the economy.

It takes time for the government to spend some $800 billion with minimum waste and corruption and maximum efficiency. Only 40 percent of the stimulus has been spent. Economists expect that almost all the growth of our economy in the current quarter -- which could be as high as 3 percent of gross domestic product over the year, after decreasing by .7 percent over the year during the previous quarter -- will come from the stimulus.

Unemployment, however, is what economists coldly refer to as a lagging indicator, a measure always found a few steps behind growth. Even as the economy starts to improve, unemployment will continue to remain high -- perhaps as high as 10.5 percent -- through 2010. This is a problem for the country, and the Democrats.

First, it hurts the long-term economy. High unemployment makes it harder for parents to provide adequate nutrition (childhood poverty has skyrocketed during the recession) and the other necessities of a supportive learning environment. It also limits opportunities for higher education. Both of these effects hurt the potential of future American workers. Private investment also suffers, as does entrepreneurial activity. While expensive policies to blunt a recession are often cast as a balance between present benefits and long-term costs, in reality the early positives are often helpful in the long run as well.

Second, high unemployment hurts the administration's political future. Especially compared to the necessary-but-unpopular rescue of the financial system, the problems in the labor market should be a serious concern. Unemployment may be a lagging indicator, but to most Americans, it's the most important one: Whatever the economy at large is doing, if you have a job, you're doing OK. If the Democrats want to stay in power, they've got to address unemployment. They may know it, too. "We?re thinking through all additional potential strategies for accelerating job creation," presidential adviser David Axelrod told the New York Times yesterday.

The political climate, though, is not particularly suited to more ambitious unemployment relief. Democrats and outside observers, including the Center for Budget and Policy Priorities' Bob Greenstein, believe that another extension of unemployment benefits is an easy lift. It's also smart policy. But the extensions won't reduce unemployment; they will merely limit the negative effects of job loss.

There is another way to prime the economic pump, though. During last year's debate over the stimulus, one of the major victims was aid for fiscally strapped states. All but one state government can't run a deficit, and during times of recession, states are forced to cut spending and raise taxes. These moves, though, only hinder economic recovery. Forty-eight states face a $350 billion shortfall over the next two fiscal years, according to the CBPP. States are addressing this shortfall with funding cuts for schools, police and fire departments, and social services, as well as with tax hikes that hurt consumer spending and thus the economy at large.

The answer is a flexible package of federal aid money to state governments, targeted to the hardest-hit areas, that will limit state-level tax increases, provide critical services, and help create jobs. The initial down payment for the outlays can come from the $86 billion returned by banks that received bailout funds, emphasizing that this is the government's effort to help Main Street as well as Wall Street. No doubt conservative governors and members of Congress will still oppose the effort, but arguments against helping the unemployed, reducing the tax burden, and making investments in teachers and firefighters will likely fall on deaf ears.

Unlike the bank bailouts, aid to states is tangible, helpful, and capable of directly addressing unemployment. Unlike the bank bailouts, aid to states is a political winner. It's about as unlike the bank bailouts as you can get -- which is exactly what the Obama administration is looking for.

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