Robert J. Samuelson: Three Crises In One (consumer spending, financial crisis and trade crisis)

Washington Post ^ | January 26, 2009 | Robert J. Samuelson

[neverdem]

We all want President Obama to succeed in reviving the economy, but that shouldn't obscure the long odds he faces. We need to recognize that we're grappling with three crises that, though interwoven, are also quite distinct. The solution to any one of them won't automatically resuscitate the larger economy if the others remain untreated and unchanged.

Here are the three.

First: the collapse of consumer spending. American consumers represent 70 percent of the economy. Traumatized by plunging home values and stock prices -- which have shaved at least $7 trillion from personal wealth -- they've curbed spending and increased saving. That's led directly to layoffs. In December, vehicle sales were down 36 percent from levels a year earlier.

Second: the financial crisis. Lower lending deprives the economy of the...

--snip--

Consider consumer spending. The proposed remedy is the "economic stimulus" plan. This seems sensible. If government doesn't offset declines in consumer and other private spending, the economy might spiral down for several years. Last week, House committees considered an $825 billion package, split between $550 billion in additional spending and $275 billion in tax cuts.

But in practice, the stimulus could disappoint. Parts of the House package look like a giant political slush fund, with money sprinkled to dozens of programs. There's $50 million for the National Endowment for the Arts, $200 million for the Teacher Incentive Fund and $15.6 billion for increased Pell Grants to college students. Some of these proposals, whatever their other merits, won't produce many new jobs.

Another problem: Construction spending -- for schools, clinics, roads -- may start so slowly that there will be little immediate economic boost. The Congressional Budget Office examined $356 billion in spending proposals and concluded that only 7 percent would be spent in 2009 and 31 percent in 2010...

[neverdem]

I just finished reading the transcript of the panel discussion on the history of economic insecurity between Samuelson, Goodwin, Beschloss, and Johnson. The day after this aired, Rush Limbaugh extolled the writings of Samuelson saying that he (Samuelson) thought that downsizings were fine because they affected individual companies or sectors, as opposed to a recession which touches everybody. I am disappointed that Margaret Warner did not raise this subject with the panel and make Samuelson defend this curious view.

I find Samuelson one of the few reasons to read WaPo.

[gidget7]

He is right, except he didn't state energy/gas/oil prices for another reason consumers are not spending, and won't begin again anytime soon.

I do know folks who have no stocks or anything like that, but they had a small amt of saving. That savings got eaten up during the energy crisis, in order for them to make it through that without blowing their budgets completely. They are young, and they will recoup. But the point is, they are not and will not be spending anytime soon.

[sickoflibs]

RE “American consumers represent 70 percent of the economy”

This only works as long as we can borrow more and more money, a complete disaster.

See : Peter Schiff on Lou Dobbs Radio (You will NEVER hear this from Washington, ever!)

[hinckley buzzard]

I have never understood the virtue of relying on consumer spending to drive the economy. Credit expansion, spending on imported goods and consumables, how do these add anything in the long run? They are like an airplane hanging in the air by its propeller. You can see it done, at air shows, but it doesn't last very long.

[neverdem]

Thanks for the link.

[ABQHispConservative]

Consumer spending is important because it is the largest component of GDP. Which is why consumer confidence is so important in terms of indicators for the state of the economy.

[pankot]

I agree with your statement. Then, why isn’t Zero taking the fastest route to increase consumer spending by sending out $10,000 rebate checks to every taxpayer. Would cost less than the amounts currently being wasted on “building,roads,and bridges”. I admit I am an idiot, but sometimes it takes an idiot to tell the smart politicians what to do.

[Pelham]

You have your choice of consumer spending, business spending, or government spending. With consumer and business spending halted, we see government spending being thrown into the breech.

[Vet_6780]

Until we write off the bad debts, then standardize and enforce leverage limits, the deflationary debt spiral will continue until the Federal Reserve system has reset to zero.

[ABQHispConservative]

Simple: it is a political decision, rather than a technical, or in this case an obvious solution.

[raybbr]

Relying on consumer spending is exactly why we are in this problem. Convincing people that they should spend their way to prosperity is nothing more than a scam.

[GOPJ]

I have never understood the virtue of relying on consumer spending to drive the economy. Credit expansion, spending on imported goods and consumables, how do these add anything in the long run?

Say you have two crack addicts using "grandpa's credit cards" and unpaid bills start piling up - the solution is NOT to give the crack addicts more credit.

[ABQHispConservative]

Then the only option left is government spending? No, lower taxes, increase disposable income, and at the same time reduce government spending, which in turn reduces the deficit and stops crowding out investment. More income means more demand, which means increased production, higher employment, more investment, etc.

[AFPhys]

I won’t read the whole article, but if he didn’t mention the the new administration’s apparent determination to get involved in the economic morass known as “saving the planet from global warming”, he missed another leg of the “CRISIS” that will reduce productivity for at least a decade, and possibly permanently.