Economists estimate that consumer spending is 70 percent of the American economy. So when consumers slow down their spending, the economy inevitably lags and unemployment persists.
And a variety of recent economic reports suggest consumer spending remains sluggish and unemployment stubbornly high.
Yet Congress and the administration are doing nothing to reverse this situation. Jobs bills in the House and Senate are too small to do much good, extensions on unemployment insurance are running out, and many centrist Democrats seem to agree with Republicans that government spending is the problem rather than the solution. To see what is wrong with that read this post by Brad Delong. The idea of another stimulus package is not being seriously considered.
Meanwhile, state and local governments are laying off teachers, social workers, and police and canceling programs for the poor, all of which will have the effect of reducing consumer spending even more.
When consumers won’t spend, government has to make up the difference. The alternative is another recession. Of course, more government spending means a minor increase in the budget deficit. But budget deficits are a problem only if they increase interest rates (too much debt to finance means you have to raise the cost of that financing) or they stoke inflation (all that money sloshing around means producers can raise prices).
What is puzzling about all the hand-wringing about deficits is that there is no sign of inflation or increasing interest rates. So why is everyone (including Democrats) clamoring for deficit reduction?
It is interesting that people who trusted the market too much when housing prices were skyrocketing, now don’t trust the market when it is telling us that our budget deficit is not too high.
Tags: centrism in politics, unemployment
