The economy suffers from weak demand. Additional purchases would provide business with the incentive to boost production and hiring.
The president’s challenge: Stimulate expenditures to promote employment.
Cut taxes? Maybe…. But people may just save the additional funds to bolster their liquidity.
Increase spending on public works? That would provide direct employment gains, and newly hired employees would spend their earnings - promoting business production and private job gains.
If the increase in public-works expenditures is accompanied by reductions in federal spending elsewhere, the impact will be muted. The economy requires a net gain in spending rather than a reallocation.
A net gain in federal spending without a tax increase will swell the deficit. That may not be politically palatable, but someone must begin borrowing and spending because private purchases are stalled.
New-Vehicle Sales
(Click on chart to enlarge)
(Recessions shaded)
New-vehicle sales illustrate the problem. Most consumers finance their auto purchases. The Commerce Department recently reported 12.1 million sales in August. That’s well below pre-recession levels of 16 and 17 million. And the trend is flat. Sales have been around 12 or 13 million all year.
If the president’s plan is big and bold enough to help auto sales recover, it will be a success. But that’s asking a lot.
(The chart was taken from http://www.beyourowneconomist.com. Enroll for additional charts on the economy and a list and calendar of economic indicators.)
© 2011 Michael B. Lehmann
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