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 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.
The $64,000,000,000 question now is, with the midterm elections behind us, are the Democrats and Republicans ready to work together and find a solution (even if it doesn’t reach the level of their respective ideological purity tests) that would actually put the interests of their constituents ahead of political mud wrestling? I’m not holding my breath.
