propped

[intjonathan]

Watch news about the stimulus/bailout plans going around, and see how many sentences are constructed with the assumption that for the economy to recover, consumer spending would have to go back up, dramatically if possible. I suspect you'll see plenty.

Now note that consumer spending drove 70% of our economy for the last few years, most of it fueled by debt, credit card or otherwise, that is now on its way to defaulting. How much more of that debt would it be healthy for consumers to take on, in order to bring the health of the economy back up? Are there other ways to fuel an economy than debt-backed consumer spending?

Comments

[marginoferror.livejournal.com]

For the economy to recover, consumer spending would have to go back up. Dramatically if possible. Any time there's slack production like there is now, increased spending and increased production doesn't cost society anything because it's utilizing underutilized resources.

This doesn't necessarily mean it has to be fueled by personal deficit spending. That's more of a wealth distribution issue.

[niralisse.livejournal.com]

...which is the part I kind of don't get. So you want to increase consumer spending, but you want to do so by distributing wealth in a manner that allows it to increase without crushing consumers under debt load. How will the stimulus packages being passed around now address that wealth distribution problem quickly enough for it to "work"?

[marginoferror.livejournal.com]

The explicit economic purpose of the stimulus is not to address wealth redistribution but to re-inflate aggregate demand. Right now our production capacity far exceeds our aggregate demand. (Justified) fears of a downturn are causing people to pull out of the market and save more. This is not a bad thing in the long run but in the short run it is... a problem.

The stimulus will use the money people are saving - by means of the government borrowing it, and borrowing it cheaply because the money market is being flooded with saved earnings - and shove it back into the economy in order to address the shortfall in aggregate demand. If this works, it will recover some of the lost jobs. The people who recover their jobs will start spending again, and other people will recover their jobs. Then the economy will be back on track. The long-term problem of wealth distribution will be addressed only coincidentally if at all.

That having been said, the shortfall in aggregate demand is reputedly about $2400 billion, so an $800 billion stimulus might work as planned but it could easily not due to size. There are also issues about how quickly the money can be injected into the economy. Theoretically the economy would benefit even if the government had to hire half of the unemployed workers in the country to dig ditches, and the other half to fill them back in, but in practice politicians will try to put the money to better use... which is good, except when it conflicts with the core purpose of injecting money into the economy quickly.

[marginoferror.livejournal.com]

I posted a primer on the stimulus on my journal, so feel free to stop by.

[niralisse.livejournal.com]

Very helpful, thanks!