State of the Economy

The failed policies of the outgoing Bush administration plunged the nation into a deep recession in 2008. Over the course of the year, employment shrank by more than 2.5 million jobs. The unemployment rate rose from 4.9 percent to 7.2 percent. With home prices falling and the stock market in free fall, more than $14 trillion in wealth evaporated in 2007 and 2008, and taxpayers were handed the tab for a $700 billion bailout.

The immediate cause of the downturn was the subprime mortgage debacle, which led to a broader financial meltdown, the paralysis of credit markets, and – as Americans surveyed the wreckage – the collapse of consumer confidence.

The deeper cause, though, was the erosion of incomes and living standards for the average working American. It’s remarkable that the purchasing power of the median household was lower in 2007 than it was in 2000; incomes never fully recovered from the last recession. In past business cycles, purchasing power rose along with the nation’s output of goods and services. This time, it did not. Instead of being spread broadly, the benefits of economic growth were monopolized by corporations and the very wealthy. With the incomes of most American households stagnant or declining, debt became the economy’s engine. That was not sustainable.

Well before the financial sector began to teeter, the economy’s fault lines were visible in the manufacturing sector. Manufacturing employment has fallen each and every month since July 2006; in total, more than 4 million manufacturing jobs have disappeared since the beginning of 2001. And the jobs that remain are growing steadily worse. Even with a boost from falling prices, inflation-adjusted manufacturing wages in November 2008 were lower than they were in 2002. Hourly pay in the manufacturing sector is now lower than in private sector services.

The seriousness of our current economic downturn requires a swift and substantial response from Washington. With consumers unable and unwilling to spend, businesses unable or unwilling to invest, and state and local governments in a budget squeeze, only the federal government has the ability to break the economy’s free fall.

Even before taking office, President Obama mapped out a bold economic stimulus package, with a goal of creating or saving 3 million jobs over the next two years. While hopes initially ran high that Congress would have a stimulus bill on the president’s desk immediately after his inauguration, that now appears unlikely. Action by mid-February is the new target.

Key components of the Obama stimulus plan include:

• infrastructure investments, including desperately-needed repairs and retrofitting of roads, bridges, schools and other public facilities, as well as initiatives to advance the use of information technology in health care. Not only will such projects put Americans to work immediately, they will also increase our economy’s long-term productive potential and, in the case of “green” building projects, reduce our energy bill and carbon emissions. Other infrastructure investments in the President’s plan would build the nation’s human capital through additional federal support for education, from early childhood through college.

• tax cuts for workers. As promised during the presidential campaign, the Obama plan includes a tax credit worth up to $500 for individuals ($1,000 for families) for working households with incomes under $200,000. The credit is refundable, meaning that low-income working families who pay little or no federal income tax will still receive a credit to offset their Social Security and Medicare payroll taxes.

• aid to states. With state budgets squeezed between falling revenues and increasing needs, the Obama plan would provide additional federal assistance for Medicaid and education programs. Without such aid, hard-pressed states will be forced to raise taxes or cut essential programs, worsening the economic pain.

• assistance to the unemployed. The Obama plan would enhance the safety net for workers who lose their jobs – including expanded eligibility for unemployment insurance benefits. Not only will this mitigate the recession’s human toll, it will also stimulate demand, since the unemployed are likely to spend any increased benefits they receive.

The UAW is pushing for speedy action on President Obama’s stimulus plan, and will resist efforts to reduce its size or otherwise weaken it by, for example, substituting additional tax cuts for infrastructure investment and aid to the unemployed. In a deep recession such as the one we’re now in, tax cuts – particularly tax cuts for the wealthy – are an ineffective job-creation tool. Much of the proceeds will be saved or used to pay down debt. This would do nothing to put Americans back to work in the present situation.

Beyond an immediate economic stimulus, action is also needed to reverse the long-term erosion of working family incomes. Otherwise, economic growth spurred by the federal stimulus will not be sustained. That longer-term strategy must include action, such as the Employee Free Choice Act, to address the imbalance of power between workers and corporations; additional investments in education and training; reform of our health care system to contain costs and ensure universal access; and a fundamental rethinking of our nation’s trade policies.

Action