Consumers Should Be "Too Big to Fail"

With the Great Recession behind us (or is it?), as distasteful as it was to see the financial, insurance, and automotive industries bailed out for their greedy and reckless behavior, it seems clear that President Bush's and President Obama's decisions to do so were correct. Allowing the "too big to fail" companies to fail, however much they deserved to die a slow and painful death, was tantamount to an economic catastrophe.

But there is another even-larger sector of our economy that has deserved the same designation of "too big to fail," yet has been largely neglected by the federal government. I'm talking about consumers. Consumer spending accounts for about 70 percent of America's GDP, so the "little people" are the real engine of our economy. You wouldn't know it though by the federal government's rather pathetic response to stimulating the economy.

The $786 billion stimulus package was a lukewarm attempt to do just that; the majority of mainstream economists agree that it kept the train from derailing, but it was insufficient to get our economy rolling along at high speed again. There have been other attempts to get the economy chugging along again by, for example, extending unemployment benefits and offering tax cuts to spur businesses to hire, but the former aren't sustainable (and businesses know that) and the latter don't offer sufficient incentive (because demand shows little sign of picking up). But there wasn't the political will to do more. Republicans decided that the federal deficit (or obstructing any and all Obama initiatives) should take priority over getting the economy humming again. Democrats were more concerned with the recent midterm elections (and look what good that did them) than showing some backbone in support of their suffering constituents.

All the talk now is about lower taxes, encouraging investment, and getting businesses to start hiring. Yet these attempts seem to ignore a few basic tenets of free-market economics that cause a giant catch-22 even a layperson can't miss. Until more consumers have jobs (or don't fear losing the jobs they have) and regain the confidence that the economy is going to recover, they are going reduce their spending to a bare minimum and sit on the money they have because they can't count on getting more in the future. At the same time, businesses are expected to hire new workers to create those jobs that people need so consumers will then start buying stuff to jumpstart the economy. But any businessperson worth his or her salt would be crazy to expand unless there was increased demand for their goods or services. But there isn't any demand because consumers are either broke or saving what they have rather than spending because they have either lost their jobs or are afraid they will lose their jobs. You see the vicious cycle and circular mess we are in.

It doesn't require a Ph.D. in Economics (or Psychology, for that matter) to see the obvious: The way to get the economy going is to view consumers as too big to fail and get money into their hands so they can start spending again. With more demand, businesses will be motivated to hire more workers which, in a virtuous cycle, will put more money in consumers' pockets who will then use that money to buy more stuff, which encourage businesses to expand, etc., ad infinitum.

As has been discussed widely, the seemingly obvious choice is for the federal government to create jobs. But how best to do that? One of the most widely discussed options is to create a Manhattan Project for our country's infrastructure because it kills three birds with one stone. Tons of jobs would be created in the private sector. The impending national disaster, comprised of deteriorating roads, unsafe bridges, an antiquated electric grid, and crumbling waterways, would be averted. And the foundation would be laid, both economically and structurally, for continued growth deep into the 21st century. Yes, it will add the federal deficit, but it will also provide much needed fuel for the engine of our economy that is now sputtering on fumes, but when rolling along again at full speed will be capable of paying down the deficit.

Clearly, putting money into the pockets of consumers isn't a panacea for all that ails our country economically now. And we do need to focus on reducing the deficit once the economy reaches a downhill section of track. We will likely need to -- No, don't say it! -- increase some taxes and cut spending (anyone who thinks the budget can be balanced with just spending cuts is living in Neverland). But it is a step in the right direction. And it would also provide a boost beyond the economic benefits to the "little people" because it would show us that our government understands that consumers are too big to fail and that it actually cares about us rather than just "giving love" to those who just filled their campaign coffers.

 
Best Response

You are downplaying what the shift in demographics has done to the consumer spending side of the economy. I think we need to realize that the baby boomers, who are responsible for the greatest generation and spending of wealth in history probably, are past their due date and are reigning in their spending accordingly. Add in the fact that their retirement probably got smashed into oblivion so they are trying to play catch up and thus not profligately spending again.

The next generations are overburdened with student loans and view the world differently. They don't, as generally, view owning their house and buying a couple cars as the dream anymore. They also just watched their parents get annihilated in 07-09 which will cloud their thinking for awhile; oh, and did I mention most are underemployed and over-levered because people chose to study softer subjects which provide less initial earning potential and job opportunities on average.

Frankly, I think we'eve reached the limits of what government spending will do to solve the crisis. They did what they needed to do, pony up a bunch of cash and stabilize the economy. The absolute last thing we need is another massive government stimulus program aimed at simply employing people to go and dig ditches, etc. What you are looking for is banks to begin lending and allow economic activity to pick up enough that you can begin raising interest rates enough to stave off inflation while allowing for some growth.

Just as a side note, you mention the 'downhill' section of the track. What do you think happens when we have to pay back the debt? Unless your plan is to inflate the debt away, and that very well might be it, all you are doing is delaying another cyclically downturn by borrowing more now. Money to pay the deficit back must come from somewhere, whether now or 10 years in the future and without rampant inflation to lower the burden eventually you'll end up in that slow growth consolidation phase.

Anyway, there are a million opinions on how to do this and mine is just one of them.

 

+1 SB for this... "I think we've reached the limits of what government spending will do to solve the crisis." Economists are too afraid to admit that the free cash stimulation plan isn't working, so the easiest way to avoid blame is to increase the printing. It's like the evil guy on the movies turning the knob until "critical mass" is achieved and everything implodes. Throwing money at problems doesn't solve the root of the problems. If you believe that, give more credit to shopaholics who are worried about their mounting credit card debt payments. That will take care of their issue.

"Decide what to be and go be it." - The Avett Brothers
 

You mention how the way to get the economy going again is to get consumers to spend more. Hasn't that been the point of keeping interest rates so low for so long? To get consumers to substitute away from saving towards spending? Seems to me that it's worked pretty well in that regard, especially as we just saw a huge increase in the consensus estimate for YoY GDP. Don't think that was because of a stronger dollar...

I think the underlying problem is that most people are under-educated on understanding the economy and how it works. If people had the capacity to look at major economic indicators and their change from the 07-09 period to now, then your argument would be almost completely invalidated.

 

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"Decide what to be and go be it." - The Avett Brothers

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