- The Washington Times - Friday, January 23, 2009

President Obama‘s campaign slogan, “Yes we can,” is becoming more like “Yes we can, but it will take awhile” when it comes to the economy.

A rash of gloomy economic reports Thursday demonstrated why his administration has been working to dampen expectations for a quick economic recovery.

Microsoft Corp. announced 5,000 layoffs — the first mass layoffs in its history — and the government last week recorded the highest one-week tally of new unemployment claims in 26 years.

Housing starts, meanwhile, fell nearly 16 percent in December to an annual rate of 550,000 units, the lowest number since the Commerce Department started tracking the statistic 50 years ago.

Mr. Obama and his aides want the public to understand that the grim picture is not going to brighten any time soon. They have said repeatedly that they expect 2009 to be a tough year, even as they call for quick action on an $800 billion economic stimulus bill.

That legislation, they say, would create or restore 3 million jobs, exceeding the 2.6 million jobs that were lost last year.

Restoring growth and confidence “will take time,” Timothy Geithner, Mr. Obama’s pick to be Treasury secretary, told the Senate Finance Committee earlier this week. “It will require action on a scale that we have not seen in generations.”

Economists say the administration’s caution reflects a steep and long-lasting recession that likely will not let up until the end of 2009. Even when growth is restored, history shows, job creation can remain elusive for months or even years.

After the past two recessions officially ended in 1991 and 2001, it took 12 months and 21 months, respectively, for the economy to start creating jobs again. Those were widely derided as “jobless recoveries.”

The latest economic data suggest a repeat of that scenario or worse.

Conditions in housing and finance — the epicenters of the recession — are the worst since the Great Depression. Major banks are teetering on the brink of insolvency, and major stock indexes have lost 40 percent or more of their value.

“The American people understand that things are likely to get worse before they get better,” White House spokesman Robert Gibbs said Thursday, while announcing that Mr. Obama is scheduling daily staff briefings on the economy as well as national security. “But I think that they can be reasonably assured that he’s working hard every day to get the economy moving again as quickly as possible.”

Sung Won Sohn, an economics professor at California State University at Channel Islands, said a big part of Mr. Obama’s job will be managing public expectations.

“Understandably, Americans want the president to announce measures to end the economic difficulties as soon as possible. Unfortunately, there is no silver bullet to end economic ills in a hurry,” he said. “High expectations tend to lead to large disappointments.”

Mr. Sohn said Mr. Obama can learn from the experience of President Franklin D. Roosevelt, who was “very good at managing expectations.” The Depression-era president started a “blizzard of activities, including public works programs,” which inspired hope and created some jobs, though they failed to spur lasting economic growth. Mr. Obama’s economic program also centers on trying to spur job creation through a surge in infrastructure spending.

“Roosevelt let the people know that the government was on their side and doing everything it could to help them,” Mr. Sohn said. “Economic historians conclude it was the Second World War, not the New Deal spending, which brought an end to the Depression. The many programs he launched did more to earn people’s confidence than to end the Depression.”

Mr. Sohn and other private economists doubt that Mr. Obama’s public works programs will produce a quick or lasting revival of growth or jobs. Mr. Sohn noted that a decade of massive public works spending in the 1990s failed to pull the Japanese economy out of recession.

Nevertheless, economists are calling on the new administration to take action to stimulate growth, given the magnitude of the downturn since last fall. While the public focuses on jobs, economists focus more on the government’s proven ability to invigorate spending in the public sector as well as among consumers and businesses, whose spending is the main source of economic growth. That is why many recommend a large package that can inject hundreds of billions of dollars into the economy.

Much of the spending in Mr. Obama’s $800 billion package, despite the rhetoric, is aimed not so much at creating jobs as helping people thrown out of work through expanded unemployment benefits, cash welfare, food stamps and Medicaid spending. Hundreds of billions of dollars more are provided to states hit hard by the recession to help avoid layoffs and maintain spending on building projects that employ millions of private workers in construction and manufacturing.

Brian Bethune, chief financial economist at IHS Global Insight, said a large stimulus package should help jolt the economy back to growth, although he favors tax cuts over spending.

“Quick, effective fiscal action is what the economic patient needs to be revived,” he said, noting that Mr. Obama was elected in large part because Americans trusted him to deal with the economy.

“The economy was the No. 1 key to Obama’s success,” he said. Now, “it is his No. 1 problem.”

Economists note that the Federal Reserve already has gone to extraordinary lengths to combat the recession, with little effect. Last month, the Fed ran out of its conventional ammunition for fighting recessions when it drove interest rates almost to zero. Now the Fed has only less-tested tools, such as purchasing corporate bonds and mortgage securities, to try to revive the economy.

“The Fed has throttled up monetary easing to maximum levels,” Mr. Bethune said. “Now it is a matter of lighting the right sparks to get the economy moving again,” both with a stimulus package and further recapitalization of the financial system through the Treasury’s bank bailout program.

“The big question is: Will they be sufficient to get the economy moving again by the second half of 2009?” Mr. Bethune said.

Mr. Bethune expects the stimulus at most will slow the pace of job losses this year. He does not expect the economy to start creating jobs again until 2010.

Louise Purtle, an analyst at CreditSights, said the stimulus package’s emphasis on building projects and aid to states is justified because the recession is expected to be long and that the spending measures need time to take effect.

Infrastructure aid, increased funding for Medicaid and cash infusions for state and local governments will help to avert severe cutbacks and layoffs by state governments, which have cumulative budget gaps totaling $350 billion in fiscal 2010 and 2011, she said.

“State and local governments are economic engines that employ more than 20 million workers, or roughly 14 percent of the nation’s work force” - far more than the federal government, she said.

The crisis among local governments has been exacerbated by difficulties they are encountering issuing debt in the stricken credit markets. Because of their balanced budget requirements, state and local governments typically act in ways that worsen economic downturns by cutting spending and raising taxes. The federal funds are needed to counteract that, she said.

Stephen Stanley, chief economist at RBS Greenwich Capital, doubts that the stimulus will do much to help the economy.

“It may improve psychology and could even provide a fleeting statistical boost to the economy,” like the $168 billion of tax rebates that helped to produce a brief quarter of growth last spring even though they failed to lift the economy out of recession, he said.

“One-off programs, whether they be spending or tax cuts, will not bring on a sustained recovery,” Mr. Stanley said. “The lags involved with getting the money out the door will be far too long to provide meaningful help when it is most needed - now.”

Mr. Stanley does not expect growth to return for another year, and even when the recovery begins, growth will be tepid. For one thing, employers tend to lay off workers quickly but are slow to rehire.

“In each of the last two business cycles, the economy came out of recession only to expand at a sluggish pace for several years,” he said. In 2001, “it took nearly two years after the recession officially ended before employment began to advance.”

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