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No Good News

3:00 PM, Aug 5, 2011 • By IRWIN M. STELZER
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Throw in the eurozone crisis. Even though American financial institutions are less at risk than their European counterparts to the fallout from this solvency crisis and the incoherent response of the eurocracy, talk of another Lehman Brothers-style upheaval has investors here on edge. With some reason: we have recently realized that U.S. money market funds are indeed important lenders to European banks. Whether relief at the announcement that the European Central Bank will support Italian bonds proves durable, it is too early to tell. My guess is that reality will overtake this gesture before too long.

Which brings us to the most watched statistic of all, the jobs report—watched not only by economists but by politicians who are wondering just how heavy a millstone around President Obama’s neck the jobs situation will prove to be in next year’s election. Friday’s report that 117,000 new jobs had been created in July, that the unemployment rate ticked down from 9.2 percent to 9.1 percent, and that May and June figures have been revised upwards a bit, is in the dodged-the-bullet category—a report that could have been worse is not a good report. Fewer than 60 percent of adults are in work, the lowest figure for almost three decades, and 44.4 percent of the unemployed, over six million people, have been unemployed for six months or longer. Some 25 million workers are looking for a job, too discouraged to do so, or involuntarily working short hours. And here’s really bad news: Economists at the Lindsey Group, who know their way around these data, say “the labor market is probably far worse than this morning’s headlines indicate.”

The economy’s struggles are focusing attention on possible fixes. There is talk of the “additional policy support” that Federal Reserve Board chairman Ben Bernanke promised would be available if the economy weakened. But he is constrained by the facts that inflation is running above the Fed’s preferred rate, and that the Fed approaches its August 9 meeting with few arrows left in its quiver. It could, of course, launch QE3, as several former Fed officials are urging. But it is more likely that it will state its intention to keep interest near zero for close to forever, and tilt its portfolio towards longer-term treasuries in an effort to drive down long-term interest rates. Any major new policy pronouncements will be held in abeyance at least until the gathering of the world’s central bankers in Jackson Hole, Wyoming, later this summer—if then.

The president is off on a bus tour of the Midwestern states, and is expected to announce a few initiatives—extending unemployment insurance and the reduction in payroll taxes, higher taxes on “the rich.” His former economic adviser, Larry Summers, and many of Obama’s supporters in Congress want him to launch a new stimulus program built around infrastructure construction, but the Tea Party has shifted the debate to cutting rather than increasing spending, and the success of the last stimulus program is, at best, limited. If the president were a fan of Frank Sinatra, he might send Summers the recording in which Sinatra croons, “Everybody has the right to be wrong at least once [but] …only fools go walking on thin ice twice.”  

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