ECO-Mon-0045-Stock iStockphoto/TIM MCCAIG

One has to be struck by the degree to which the Obama Administration has underestimated the depth of the current economic recession in setting economic policy at the start of its term. Whereas in January 2009 the Obama Administration thought that its fiscal stimulus package would prevent unemployment from rising above 8 percent, already by June 2009 unemployment has risen to 9.5 percent. Worse still, the rate of decline in overall hours worked is yet to show any sign of moderating, while the Administration itself recognizes that unemployment will peak at above 10 percent of the work force.

The degree to which unemployment already exceeds the unemployment forecast on which the Obama Administration's economic policies have been premised has to raise serious questions about the adequacy and appropriateness of those policies. First, it must raise questions as to how much sense it made to have only one third of the US$780 billion fiscal stimulus package come into effect in 2009, the year in which fiscal stimulus was most sorely needed. Similarly, it has to focus attention on how poorly designed was that fiscal stimulus package from the point of view of getting the most bang for the buck and how laden it was with pork.

Second, questions now have to be raised as to whether the Administration is being overly sanguine about the health of the financial system and about the amount of support that the financial system still needs. It now seems all but certain that unemployment will rise significantly above the worst case scenario of the Administration's recent stress test for the 19 major banks, which has to imply larger than expected loan losses at those banks. And third, one has to wonder whether the Administration's efforts to stabilize the housing market are nearly sufficient given that a higher than expected unemployment rate will certainly exacerbate the country's foreclosure crisis.

The very real risk of wage and price deflation now posed by very much larger than expected gaps in the labor and output markets would suggest that it is not too early for the Administration to go back to the drawing board to strengthen its policy approach. At the very least, the latest dismal employment figures should put paid to any thought about an early exit from stimulus measures.

Desmond Lachman is a resident fellow at AEI.