The HS Dent Financial Blog

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The Turmoil of Tighter Belts

For over a year we have been dealing with the aftermath of slower and lower spending.  The repercussions of an overall spending decline continue to echo through the economy, with unemployment and slack capital stock being the most evident signs.  Our legislators are desperate to find a way out, and economists are debating the merits of more stimulus versus tax credits (a different form of stimulus) in order to pull job creation through the system.  The problem is that all of this misses the forest for the trees - we are choosing to spend less as consumers and that is a GOOD THING.  Cajoling, bribing, and in the end demanding that we spend more is not just irresponsible, but truly harmful. 

The exasperation with this situation is not limited to one economic or political view.  The differences are confined to the approach while the goal remains the same - get the economic engine going again through increased consumption. 

A better policy would be to explore what we can and should do when faced with excessive unemployment created through slack consumption.  Should we leave the unemployed on successively longer benefits (the state of NY is moving its unemployed benefits to 99 weeks)?  Should we dredge up the CCC and WPA of the ’30s and ’40s, not only handling work that needs to be accomplished by brazenly tackling make-work programs (state parks in the middle of nowhere)?  Or should we start down a path of cannibalizing market share, which would consist of identifying all of the industries that have moved overseas that we could quickly recapture through some targeted investment program, not through tariffs or a “guaranteed work” agreement? 

I don’t know the answer, but I strongly believe that this is the question.  The stimulus plan has not fulfilled its intended goal of containing unemployment below 8%.  Most of the funds spent so far have served only to plug ever-widening budget gaps at the state and local level.  If that is the goal, to use federal funds to keep states solvent so that they can maintain their employment rolls beyond their own fiscal abilities, then let’s be clear about it.  As we go down the path of ever-increasing federal budget deficits, we need to understand exactly what we are getting for our increased future burdens.