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EconomicPolicyInstitute October 17, 2008

Although there was little to cheer about in the chaos of the financial market meltdown and the federal government’s $750 billion response, EPI this week was glad to see the Treasury Department change its thinking about buying stakes in rescued banks and other financial institutions, rather than merely purchasing their troubled assets. An EPI statement in late September called for just that, saying “direct recapitalization of troubled banks and financial institutions by federal government purchase of preferred stock–rather than buying toxic assets–would better protect taxpayers and prevent unjust enrichment of negligent executives and investors.” Sounds complicated, but there is a simple logic to this: Most investors would rather own a piece of a functioning business rather than a bundle of securities whose value is unknowable. Treasury Secretary Henry Paulson had been adamantly opposed, but changed his mind after a similar approach was taken in Britain. As the market volatility continued through the week, EPI economists provided media with extensive analysis of both the problems and proposed solutions from the perspective of American workers.

Underemployment at 14-year high
The nation’s growing jobless rate has gotten growing attention, but the full extent of employment woes has gone unrecognized. In this week’s Snapshot, economic analyst Nooshin Mahalia examined underemployment–a fuller measure of labor market slack. Underemployment includes workers who involuntarily work part time as well as those who want a job but have stopped looking. Mahalia’s analysis reveals that underemployment is at 11%, the highest it’s been in 14 years. With 9.5 million unemployed workers, 6.1 million involuntarily part-time workers, and 1.6 million workers who are no longer looking for work, this measurement shows that the jobs crisis is worse than many realize.

EPI on the road
This week, EPI economists Jared Bernstein and Heidi Shierholz and Outreach Coordinator Christian Dorsey presented research findings and policy proposals for economic renewal to a gathering of foundation and community group leaders in Chicago convened by the Joyce Foundation. Ralph Martire of the Center for Budget & Tax Accountability, the Illinois affiliate of the EPI EARN program, provided a local perspective, highlighting the Center’s State of Working Illinois report (all of the state-level reports published by EARN groups can be found online). Other organizations represented included the Center for Economic Progress, the McCormick Tribune Foundation, the Chicago Community Trust, the Retirement Research Foundation, and representatives of several Chicago-area universities. Among the topics: growing inequality, stagnating wages for workers, historically low job creation, and the failure of the Bush administration to act early to stem the growing financial crisis. Dorsey outlined the benefits of job creation through public investment–with a focus on renewable energy–particularly in the Midwest, which has been hit hard by the loss of manufacturing jobs. For example, vacant auto plants could be retooled to accommodate the manufacture of hybrid cars or solar panels. Also in attendance was Caitlin Naidoff from the Office of Sen. Barack Obama who has advocated just such an approach in his campaign for president.

Our Knol
John Irons, EPI’s director of policy and research, offered a stinging rebuttal to the Cato Institute this week on Google Knol. Google’s latest online venture is being promoted with a series of pre-election debates between experts of opposing views. It was kicked off with an examination by EPI and Cato of the bailout plan and ongoing financial crisis. Cato’s initial proposal recommended allowing financial institutions to fail and avoiding government involvement at all costs. In this weeks’ response, Irons explained the heavy costs of such an approach–costs to the real economy and regular Americans. “We have ample evidence of waste and poor decision making in recent years,” wrote Irons. “But we also know that monetary and fiscal policy can, if done right, impact the economy and improve people’s lives.” To argue against government intervention in this case was to argue against fundamental economic science, Irons said.

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