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Rising unemployment poses threat to US recovery

July 15, 2009 11:09 IST

The debate on the economic condition of the US has most recently focused on the effectiveness, or lack of it, of the fiscal stimulus package that the Obama administration initiated very early into its term.

There is a growing body of opinion that says the $787 billion boost is simply not large enough. Although there has been much talk of green shoots in the past few weeks, as indicators like consumer confidence and housing starts have begun to stabilise, the one persistent source of concern has been unemployment.

In June, the economy lost a further 467,000 jobs, less than the 700,000 job losses per month in the first quarter but still symptomatic of severe recession. This raised the unemployment rate to 9.5 per cent, a level not seen since the recession of the early 1980s. Even though it is well understood that the unemployment rate is a lagging indicator, i.e. it continues to increase for a few months after the economic cycle has turned, the high numbers are becoming the centre of a political storm.

There are two groups of people who believe that the stimulus isn't working, but they draw entirely contradictory conclusions from that assessment. On one side, there is the perception that it was the right way to go, but more needs to be done.

Paul Krugman is a notable advocate of this view and he has been recently joined by Laura Tyson, who chaired President Clinton's council of economic advisors and is an advisor to President Obama.

On the other, Republicans are predominantly of the view that the whole idea of a fiscal stimulus is flawed and the fact that this one isn't working proves their point. On this premise, the prospect of getting Congressional approval for a further stimulus, even with the Democratic majority, is risky. President Obama and some of his advisors are therefore making a virtue out of necessity when they argue that it is too early to write off the package and it must be given time to work.

In the meantime, persistently rising unemployment will very likely reinforce the basic drivers of the recession, adding credence to the "W" view of the recovery, which says that the modest recovery heralded by the green shoots will soon be followed by another recession as consumer spending simply cannot be sustained and foreclosures rise while home prices fall further.

If this happens, it will have significant negative implications for the Asian region, which is already suffering from a massive decline in exports. But, given the stalemate that appears to be emerging on the issue, US workers and consumers may have to take their chances with the original stimulus and hope that President Obama's confidence is justified.

As for other countries, their capacity to increase fiscal and monetary stimuli will determine their ability to insulate themselves from this eventuality.

Business Standard
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