History has shown that the US government needs to boost spending to rise out of a downturn. But with the 2012 election on the horizon, the White House hesitates to take the political risk.
Susan Walsh / AP / File
Americans are deeply confused about why the economy is so bad – and their President isn’t telling them. In fact, the White House apparently has decided to join with Republicans and blame it on the long-term budget deficit.
Before I turn to the President, though, let’s be clear: The lousy economy is due to insufficient demand. Consumers – who are 70 percent of the economy — can’t and won’t buy because they’re running out of cash. They can’t borrow against homes that are worth a third less than they were five years ago, and most consumers are bad credit risks anyway because they’re losing their jobs and their wages are dropping. They also have to start saving for the kids’ college or for retirement, which will cut their spending even more.
Without enough consumers, businesses won’t hire enough people and pay them enough to reverse the vicious cycle. So we’re dead in the water. Even the stock market has caught on to the truth.
Which means government has to step in to boost the economy – as it has every time the economy has fallen into recession over the last eight downturns. Include the massive spending on World War II that lifted us out of the Great Recession, and it’s nine. The Fed can help, but it can’t do it alone. And it’s least helpful after a huge asset bubble has burst because the financial system won’t channel low interest rates where they’re most needed – to small businesses and average consumers.
This time we tried one stimulus that was way too small relative to the size of the falloff in demand that started in 2008 — especially given that states and locales cut their spending by almost as much as the federal government increased it.
So we need another – a bold jobs plan. (I’ve offered an outline of what it might look like in prior posts.)
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