Why America won’t pay for more stimulus
This morning’s jobs report revealed that 79,000 net new jobs were created in the country in May, nearly 50 percent below the consensus forecast of 150,000. Almost immediately following the release, there were loud and insistent calls for another round of monetary and fiscal stimulus. “Job growth stumbles again, raising pressure on Fed,” the Reuters headline ran. My fellow Reuters blogger Felix Salmon called for immediate federal stimulus funded by more debt issuance. Felix’s rationale, like many others’, is that with U.S. borrowing costs so low, stimulating current economic activity is a higher priority than worrying about paying down the debt in the future. Or to put it differently, a little more debt is preferable to enduring the economic pain of the economy rightsizing itself.
However, economic weakness is concentrated in just a few regions, and the solutions that many are pushing for – additional fiscal stimulus from Congress or further monetary easing from the Fed – are too diffuse to make much of a difference or require a national constituency that is unlikely to materialize. Unemployment fell in 37 states in April, but in California, Rhode Island and Nevada, there are still massive employment problems. The National Conference of State Legislatures reports (emphasis mine):
Unemployment rates were down in 37 states, the District of Columbia, and Puerto Rico in April 2012. Only five states saw unemployment rise and eight states had no change for the month, according to figures released by the Bureau of Labor Statistics on May 18, 2012.
Compared to a year ago, unemployment has decreased in 48 states, D.C., and Puerto Rico. Nationally, the unemployment rate has dropped nearly a full percentage point over the last year.
Nevada continued to lead the states with the highest unemployment rate, at 11.7%, but that is down from 12.5% in April 2011. Rhode Island had the second highest unemployment rates, at 11.2%, with California coming in third, with 10.9% unemployment.
Unquestionably, California is in dire trouble, but because it is so large – the state accounts for one-eighth of the national economy – it skews the national numbers. Nevada and California are also still suffering from the housing bust, and property values there remain largely depressed outside of prime demand areas. Would residents of North Dakota and Nebraska, where unemployment is 3 percent and 3.9 percent, respectively, and where the housing bust was only lightly felt, really have an appetite for support more federal stimulus if they don’t stand to benefit?
The localization of economic malaise might also explain why the efforts of the Federal Reserve have not been more profound. The Fed’s monetary policy tools are national in scope and cannot be pinpointed.
Changes in state tax collections also show the wide disparity in economic activity. Between 2010 and 2011 tax collections increased a measly 0.4 percent in Hawaii while leaping 44 percent in oil-and-gas-rich North Dakota, according to the Tax Foundation. North Dakota certainly needs no stimulus, and state collections increased 8.9 percent across the nation for fiscal 2011.
The economy is slowly healing from its massive debt hangover, but there are no macro solutions to localized economic problems. I’m not convinced that the federal government is equipped to fix primarily local issues.