More Government ‘Stimulus’ Will Ensure Protracted Economic Stagnation
by Robert HiggsIt must be a condition of employment that a journalist who writes about the current recession include in his article the statement, “consumption makes up more than two-thirds of the economy” or “consumption spending accounts for 70 percent of GDP.” This seemingly simple, factual statement, however, is nearly always intended to carry some explanatory weight, and on occasion the writer spells out this explanation by adding a statement such as, “unless consumers begin to open their wallets and spend more, recovery from the current recession will be impossible.”
At first glance, this journalistic commonplace appears to make sense. Anyone can understand that, say, a store at the mall will not hire additional employees unless its sales increase enough to justify the additional expense. Hence, would-be employees will remain unemployed; they will purchase fewer consumption goods than they would have purchased if they had jobs; and therefore the stores will not hire more workers; and so forth. The circle of a theory of income and employment seems to be closed, and thus an explanation provided for the lingering recession: consumers are not spending enough.
One does not need a Ph.D. in economics, however, to discover that something must be wrong with this way of thinking about prosperity and recession. Checking the national economic accounts produced by the Commerce Department’s Bureau of Economic Analysis (Table l.l.6), one finds, for example, that the most recent quarterly peak in real personal consumption expenditure occurred in the fourth quarter of 2007. This spending ($9,244 billion at an annual rate) equaled 69.2 percent of contemporary GDP ($13,364 billion at an annual rate)—where the data are expressed in dollars of 2005 purchasing power. Real GDP did not fall significantly until the third quarter of 2008. When it reached its trough in the second quarter of 2009, it had fallen to $12,810 billion, down about 4 percent. At that time, real personal consumption spending was $9,117 billion, down only 1.4 percent, and equal to about 71 percent of GDP. Thus, as usual over the course of a boom and bust, consumption spending varied proportionately less than GDP as a whole.
As every student of the business cycle learns early on, the most variable part of aggregate expenditure is private investment. When real gross private domestic investment peaked, in the first quarter of 2006, it was $2,265 billion, or 17.5 percent of GDP. When it hit bottom in the second quarter of 2009, it had fallen by 36 percent to $1,453 billion, or 11.3 percent of GDP. (Deducting investment expenditures aimed at compensating for depreciation of the private capital stock [Table 1.7.6], we find that real net private investment—the part that contributes to economic growth—in the most recent quarter was only one-third as great as it was at its peak in early 2006.) The ups and downs of the business cycle are obviously driven not by consumption spending, but by investment spending.
In the second quarter of 2010, real personal consumption was $9,270 billion, or slightly above its previous peak, at an all-time high. If stimulating consumption spending were the key to an economic revival, we would have achieved one already. And if we accepted real GDP as an adequate index of the economy’s health, we might affirm that conclusion, given that in the most recent quarter, real GDP was only 1.3 percent below its previous peak. With the official unemployment rate stuck near 10 percent and millions of people having left the labor force or having settled for part-time work, however, that conclusion is hard to swallow.
The vulgar Keynesian focus on consumption unfortunately tempts politicians to approve “stimulus” measures aimed at pumping up this part of total spending—measures such as long extensions of unemployment insurance benefits, aid to state and local governments to help them avoid personnel reductions, and increases in the salaries of federal employees. Some economists even go so far as to single out such measures for special praise on the grounds that because such payments are most likely to give rise to consumption spending in the near term, they have the greatest “multiplier effect.”
Such arguments, however, fail to grasp the true nature of the boom-bust cycle, especially the central role of investment spending in driving it—and, more important, in driving the long-run growth of real output that translates into a rising standard of living for the general public. Politicians, if they truly wish to promote genuine, sustainable recovery and long-run economic growth, need to focus on actions that will contribute to a revival of private investment, not on pumping up consumption. In the most recent quarter, real gross private domestic investment was running at an annual rate more than 20 percent below its previous peak and, as noted, real net private investment was fully two-thirds below its previous peak.
To bring about this essential revival of investment, the government needs to put an end to actions that threaten investors’ returns and create uncertainty that paralyzes their undertaking of new long-term projects. Gigantic measures such as the recently enacted health-care legislation and the financial-reform law, which entail hundreds of new regulations whose specific content, enforcement, and costs are impossible to forecast with confidence, contribute to “regime uncertainty” [also see the book Depression, War, and Cold War] and thereby encourage investors to hold large cash balances or to park their funds in short-term, low-yield, less risky securities. Such investments cannot support genuine recovery and sustained long-run growth.
In sum, our crying need at present is for a robust revival of private long-term investment. Consumption-oriented government “stimulus” programs, at best, only ensure a protracted period of economic stagnation.
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The vulgar Keynesian focus on consumption unfortunately tempts politicians…
Funny, how leftists who decry the "materialism" of the right, promote failed economic theories which are consumption-centric. Sort of like how Cankles wanted to pay for health care with taxes on cigarettes.
BHO the Economic Manchuian Candidate?
As we all know the definition of insanity is doing something that does not work over and over again. So, is this administration insane? I doubt it. Then what is going on here?
A closer look at the administration through their collective writings, the speeches, and backgrounds reveals them to be very far left leaning. Many of them openly quote some of the many architects of the leftst movement. People like Saul Alinsky, Cloward and Pvien, etc..
What does it tell you about this administration's value of human life, when one of its high ranking members in their Propaganda Ministry, Anita Dunn tells a group of HS seniors her favorite political philosopher is Chairman Mao? This is the person she turns to most? In case anyone reading this is not aware, history shows he is responsible for a minimum of fifty million human deaths in the aftermath of the 1949 communist revolution.
These are the some of the people who have created the blueprint for tearing down the hated free market system. What else could explain what is being systematically done to this country?
This is where the Government falls far short.
They have no comprehension of business, or capitalism. They only understand bureaucracy.
Maybe a recovery isn't what this administration had in mind? Afterall, they want to "fundamentally transform the United States of America." How do you do that without tearing down the current system?
Consumers have cut non-essential consumption due to uncertainty of future expenses. Businesses won't hire due to the same uncertainty facing average American families. 0bama and the "professional left" are the ones creating the uncertainty with a radical expensive agenda that expands government power. Get rid of the Democrats and you solve the two major problems stagnating the economy.
Next, repeal & replace 0bamacare, revise the Wall Street reform bill, extend the tax cuts, cut corporate tax rates to stop the bleeding of jobs overseas, and watch a true recovery in action.
A List of Factual Googleable Statements http://american-trojan-horse.blogspot.com/2010/09...
“I’m Not a Birther, But…” http://american-trojan-horse.blogspot.com/2010/09...
Why Do People Think 0bama is a Closet Muslim? http://american-trojan-horse.blogspot.com/2010/09...
Republicans are very funny people. One the one hand
they want to export all of the Mexican illegal aliens and
on the other they want to import the Mexican approach
to economic policy, which is essentially no middle
class.
More money for the lazy people…..that's all any stimulus does.
I'm so tired of this mess……I said it before and I'll keep repeating it until it happens.
Until we get rid of these unnecessary union groups and programs, and replace them with something sensible, like helping people get a job, we can kiss our paychecks good bye.
Programs should have a time limit, and help people get back on their feet, NOT abused and used for income for life.
I think this time is different, the housing market is not coming back, so I doubt that it makes any difference what the gubberment does, they damn sure are not going to cut spending deep enough to stop the bleeding. We need to stop the bleeding of our manufacturing and to do that we need cheaper energy.
The only real hope is to pull back regulations on energy, especially federal, state and utility regulation on the grid. Removing grid regulations and interconnection fees would allow cheaper providers of energy to compete with utilities and lower the cost of energy—lower energy cost is the quickest fastest and surest way to start a new industrial revolution. Stop outsourcing 600B in petrodollars to fund our enemies and start using American natural gas and hybrid diesel trucks, buses and ships.
http://www.cnbc.com/id/39055357
"House Republican Leader John Boehner onWednesday proposed a two-year freeze on all tax rates and a cut in government spending to the levels of 2008, before a deep recession took hold of the economy."
Idiot. They just don't get it. Freeze? Drop to 2008 spending?
Is anyone around who has a fucking brain? We are screwed.
I love that phrase ‘consumption is the majority of GDP”. There is an issue when government is doing the consuming and the private sector is holding what they have. GDP gets skewed heavily and can show cute curves of growth until the bill comes due.
Inventories can be exaggerated as well to help the overall number but after two quarters that is hard to conceal.
If the private sector is not spending, there must be good reason. Could it be that they are hedging against known tax increases? Or, perhaps they are hedging against known healthcare cost increases. We sit on our money because the government is doing everything they can to get more of it. The end result is really quite simple to understand.
Stagnation, inflation (too much cash in the machine), and poor consumer confidence.
"and to do that we need cheaper energy." So what does Obama want – to raise taxes on gas!
This is for the most part, a conservative site (anti-statist), Republican by default.
So is it your contention is, that the middle class is created by government? What level of income constitutes the middle class? When does personal responsibility come into the picture? …can do, rugged individualism of the American spirit that created America. As far as the illegal invasion, we now have 1/5 of Mexico in the USA, how much of Mexico is enough?
Actually it's the progressives that want us more like Mexico – The elite to have total control and everyone else to be poor.
This BS method of "stimulating" union jobs by borrowing money from our future in order to pay for union-only, shovel ready work better stop when these demon-crat's get swept out.
Leftists are just plain stupid and cowardly.
I have a bumper sticker that says 'honk if you voted for Obama so I can give you the finger'.
The only idiots who ever honk are when I am in big cities, and they always wait until they are pulling away from me, like cowards. Every damn one of them – and there aren't that many to be honest.
"If America is on it’s back, we use less oil, we eat less food, this deals with urban sprawl, etc. …it’s simply not fair that we have so much, and the rest of the world is still pissing in their drinking water"
How ironic, since America on her back would send the price of commodities into the toilet. Russia's petro dollars dry up and another 20 million starve to death. China's cheap manufactured goods stop flowing and a country of a billion and a half people descends into anarchy. India and other developing nations collapse as American companies close their doors. Europe is left defenseless against the Russian bear and islamic radicals. South America breaks into bloody revolution.
And they call this "Spreading the Wealth."
Some would say it's a way of spreading a New World Order.
Last I checked this isn't mexico, this happens to be the US. We don't want illegals. If they want to come here to work and have a better life for themselves, they can stand at the end of the line with the rest of the aliens who have been waiting for years. But to come here and get free handouts so the progressives get another vote, is not only un American it's criminal.
Republicans don't want to export Mexicans, they did nothing to stop illegal immigration in the past (e.g. "build the dang fence" -McStupid, McAmnesty). It's only a hotbutton topic this year because of the elections.
Both D's and R's like fiat money, central banking, the Fed, and regulations that force everything from the food industry to airline industry, to energy, to medication/drugs into large conglomerate near monopolies.
Both parties prefer the communist manifesto of government schools, central banking, and progressive taxes.
I must say though, Democrats have really shined when you look at inner cities, and their most loyal voting block, inner city blacks, and how they prosper just slightly below Asians.
I must say also, that Republicans have really shined when you look at how they have coddled Afghanastan as a welfare state that needs more time, occupation, and money to become a western democracy and strong ally for the future.
The economy will improve when Obama figures out the umbrella thingy….
A simple device to the working man but a complicated "Rube Goldberg machine" to a brilliant intellectual like Obama….
"Honk if you voted for Obama……." ROTFLMAO………. HA HA HA HA HA HA HA HA HA
That laugh was worth a MILLION this morning, Thanks Harry!
.
http://www.zazzle.com/honk_if_you_voted_for_obama...
Honk,…..Honk,……………???
if you voted for Obama
not even Obama's daddy would honk now
So is it your contention is, that the middle class is created by government?,………….
I sure would like to here his answer to that one.
John, as we know liberal O-bots are economically retarded. Their redistributive policy has nothing to do with growth, but to encumber the miracle of civilized man, the USA. We look at it the disaster that is Barry, and say, how can anybody be so stupid? That’s the point, in their feeble brains, they’re succeeding famously. Their only concern is their harebrained ideology, the good news, we’re hip to their horse shit, and corrections will be made on 11/2/10-12-14-16…
"Republicans … want to import the Mexican approach to economic policy"
Dude are you high? What the hell are you talking about?
Picture the GLOBE on a tightrope,,,, holding the balancing rod in it's hands.
China and Russia are both steadily buying US grain, seems they have a 'shortage'. Of course no one
mentions that the US is operating on a 30 day supply, do they? Corn harvest has begun, prices should
be at their LOW of the year, but the opposite is true.
Check out the rise in grain prices (especially wheat) over the summer and your eyes may be opened.
I will only say, WE LIVE IN PRECARIOUS TIMES!
Edit: Precarious you ask? Go to farmfutures.com and click on the piece by Bryce Knorr, scroll down to
a short paragraph on Russia about 2/3 of the way down the article……… Who's in charge?
.
Yes, by government and private enterprise working together. Without intervention by our government we would essentially resemble Mexico and therefore have no middle class. For example, the G.I. Bill moved many young men and women into the middle class. Yes or no?
HiPlainsDrifter NAILED it ! There is NOT ONE corporate or intelligent economic advisor anywhere NEAR this administration ( by design ). They are devoid of private sector policy even though the numbers prove time and again the success of small business and their calcuable and successful contribution to the GDP. A TEN YEAR OLD understands this better that the oval office POS. Only one solution if the USA is to remain viable and secure in future generations. Get rid of the ADMITTED Marxist/Socialists FOREVER ! The citizenry has now been fully exposed to what these filthy liars are all about. TSUNAMI ? Not even close. It will be a crescendo and cacophony of obliteration for the Democrat Party for generations.
Democrats ? Thanks for informing the general public. Most of us conservatives knew this from the start. We are hopeful many of you corrupt bastards will spend time with Rocky and Bruno in your cozy cells.
The point the socialists miss is that it is the rich and prosperous who invest in the private sector to create jobs. They seem to forget or to ignore the fact that It is our government, congress and its leeches, who have through restrictive legislation, unrestrained taxation, and agencies(usaid) that aided business to relocate industry and jobs overseas. In less than fifty years our nation has gone from an industrial based economy to a service based one.
To turn our nation around to profitability, business needs to be reestablished here at home, taxes must be cut, foreign aid must be severely cut back, balanced foreign trade agreements must be legislated, unions must be brought under control, pension plans need be scrutinized, and we must become energy independent. That is if we wish to be competitive in the real world. Otherwise we become just another Greece. And I assure you no one will come to bail us out.
The key word in "Gross Domestic Product" is Gross. It includes all revenues of any sort. Many of those revenues are effectively counted twice or more. As a measure of economic health, its utility is dubious at best.
The key word in our economic recovery should be Product. We cannot consume what has not been produced; simply pumping more money into the economy won't do anything but reinflate prices — a reprise of the way we got to where we are today.
The conditions for renewed production are:
1. A stable legal and regulatory environment;
2. Lowered tax rates;
3. The return of confidence among American entrepreneurs and investors that the first two conditions may be relied upon into the future.
The Obamunist Administration has actively worked to thwart all three of those requirements. Hence, our enduring malaise.
Remember in November.
There are two words that come to mind that I've heard with increasing regularity since Obama was sworn in. The first is uncertainty and the second is unexpected. Uncertainty in what is being produced by the crippling effects of Obama's economic policies on the business community. Here we have a president who states he wants hundreds of billions of dollars in tax breaks for business R&D and in the next breath says that the Bush tax cuts for the "wealthy" are dead! Unexpected in that the Maytag Media (in constant spin cycle) keeps trying to deflect criticism away from the "chosen one" on a seemingly daily basis when another miserable economic report comes out. I'm almost 50 years old and this man, without a doubt, has been the biggest mistake this country has ever made.
Crash the system on a global scale and you clear the way for One World Government assuming anyone is in a position to consolidate it.
And cut government spending.
You know you got that wrong there about the middle class. The middle class only existed as the government moved out of the way and allowed people to grow and create businesses of their own. In places where you have more government control, the middle class disappears. In order to keep the middle class, you need free enterprise and less rules/regulations and taxes.
The middle class is created by an environment enabling upward mobility.
That environment is created by business growth and expansion, which by necessity creates jobs.
The government is only able to throttle that effect, slowing it by increased taxation and regulation, or by reducing taxation and regulation and enabling the pace of economic growth to increase.
The ONLY jobs government can create…….is GOVERNMENT jobs.
Government jobs to not produce anything to add to the gdp, or business growth.
The GI Bill>>>>>>>>>>>>>>>>>ObamaCare, Stimulus, Cap n Trade
can ya please come up with something intelligent there richie,…????
All this talk about a tax holidays for a year or tax cuts for a year, etc., is so much crap. Even if you could keep enough money to justify hiring an employee, why would you when you know that that same money will be confiscated when the taxes return in one year? Usually, employees are a long-term investment. The most I could see would be a small surge in the number of temp. workers. And, when it becomes obvious that businesses are doing everything they can to streamline their operations to lower overhead costs, why should I spend my paycheck like I have job security?
Finally, someone that is able to get some exposure is telling the true story, in a voice that everyday Americans (not elitist college professors) can understand. Thank you.
http://www.cafepress.com/politicalstckrs
They should stop calling it stimulus and start calling it anesthetic – it is designed to keep people from feeling the pain.
Yup,
Olinsky gave the opening when he offered a 100B tax cut for infrastructure spending–what does new infrastructure do–adds efficiency and efficiency is the low hanging fruit of lower energy cost.–combined heat and power CHP would thrive in that kind of market place, especially if the grid was deregulated to allow competition with utilities.
Hey, Dickporter! What you as a clueless leftist fail to realize is the the U.S. government creates NOTHING. They're the ultimate consumer. And who's importing the Mexican approach? Conservatives want everyone to succeed, to progress through the economic ranks until they're wealthy. Liberals want to tear down anyone who's successful by excessively taxing anyone who's productive in society; that effectively targets the middle class.
Got a great idea for you. Next time you decide to post why don't you get some facts before you type. That way your family won't have to hang their head in shame.
No you twit. The G.I. Bill didn't move anyone into the middle class! Plenty of people qualified for the G.I. Bill and never moved up the social/economic ladder! It's not the education that makes someone successful, it's what you do with that education.
Based on your argument only someone helped by the government can be successful. That just shows your ignorance. Why don't you talk to someone who's not in your normal circle of influence so you get a more realistic view of America. Or you could just move to Europe. No, wait. Europe is rejecting your kind of liberalism across the board. Guess it's off to China then?
Yea. We need someone to evaluate each federal program to determine if the federal government should be funding such activity. If the activity isn't necessary to support the federal government then it needs to be dropped. Not cut, not scaled back, eliminated.
Both D's and R's? They're not really D's and R's. They're P's. Progressives love the fiat money, the Fed, and the big government that comes with the regulations.
Excluding defense, cut it then evaluate, why waste time.
"There's something about Marxism that brings out warts; the only kind of growth this economic system encourages." P.J. O'Rourke
The parade of "stimulus" and other programs trotted out by the administration bear more than a little resemblence to the old Soviet "Five Year Plans" and they are about as effective. The leftist push to, in Obama's words, "spread the wealth around" requires a command and control economy which is destructive to economic growth. Rather than make another pie the leftists will keep dividing ithe existing pie until there isn't anything left. The end result of Obamanomics will be the same as the former Soviet Union- total economic COLLAPSE.
There's a wart epidemic in Washington D.C. The eradication begins in November.
Making the great recession into the great depression part II. And now we know why the rest of the world didn't participate in the first great depression — manufactured by the Democrats.
If you look back it at, every depression started out as any recession, yet the Dems/Progressives/Liberals, always turn that bacis recession into a depression. They have been doing it since Wilson.
They just simply make a bad yet ordanary recession worse than normal. The only difference now, is that the current recession, much like the Great Depression was self-created by the government.
If we get these economic idiots and destroyers out of the way, then our economy will boom again and bounce alot faster out of this recession.
Great info. Good Post and plan to Restore Justic & balance to U.S!
what a waste of a fantastic logical retort,……. there Geek
If I own ANYTHING of value, I am going to hoard it in an uncertain world.
However, when I have reasonable belief that I will earn a reasonable return on it, I will be willing to lend it out, or trade it for something that earns me a return — like a lawn mower, a dump truck, or an entire factory.
In such conditions my neighbors will also make similar investment decisions, and we will begin to have income from those investments that we are willing to spend, because conditions are stable, AND conducive to more productivity, and more income from our investments.
On the other hand, in an uncertain world, even if some fool starts passing out money, I will spend some on necessities, but I will hoard the money and the necessities, because I am STILL uncertain. I SURE as hell am not going to invest it. That is, I am going to CONTINUE to protect myself from risk instead of TAKING any risks.
But, do feel free to throw money out of helicopters. I'll pick it up. Just don't expect folks to start doing anything economically risky with it.
If you want people to do those economic things that cause growth, provide a stable environment where people are willing to RISK the things of value that they are hoarding.
You want relatively quick results? Lower taxes PERMANENTLY. That will reward all levels of risk taking by increasing the reward. The increase in economic activity will RAISE revenue to the government as it always HAS. How could it not?
Then get rid of all bailouts to corporations, and to the unemployed. They will find work, and increased work will find them. Utopian economics has NEVER worked, but American Capitalism has provided the very best standard of living for the most people the world has ever known. Stop killing the good in a vain search for the perfect.
This ain't rocket science.
Henry Ford created the middle class and government had nothing to do with it. He made products for the wealthy available to the people who built the products. Government is an inherently corrupt parasite that bleeds the middle class. Mexico is just an even more corrupt government than ours which is why they have a small (not no) middle class.
eh….these days a million ain't that much…
Putin and his baseball bat? just kiddin – NOT
The only economic 'advisor' barry has is the sad creepy sack of sh** soros – yea know, the guy who just loves America!
I can't take it anymore! Is there just ONE person who can stop this runaway train??
Marx follower = Anti-American
any questions?
Too True ,,, Average
.
YEP !
.
Heh, Robert Higgs (Bob), I'm a little late to the intense debate.
I think that your theory needs a little more tinkering. Here's why.
I will ignore change in private inventory and depreciation for purposes of simplicity, After all, inventory is only a quarterly mismatch between production and consumption. The household and business sectors can be real "uncertain" after all.
The entire decline (well almost 90%) in real fixed investment between 2006.I and 2010.II is due to the decline in residential and non-residential structures. You could look it up in BEA Table 5.3.6.
So if i catch your drift, Bob, we should all stand on our heads so that another hotelier can build another lodging establishment, another mall developer constructs another shopping plaza and another home builder erects another house. That's what we need, Bob. One more hotel, one more mall, one more house. I don't think so, Bob.
You need to disaggregate private investment data, Bob. Equipment and software barely missed a beat.
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