In America's economic system, money spent is what fuels our economy. Money spent creates demand which in turn creates jobs which creates money and thus the cycle goes on. If the cycle is interrupted, as it is in a recession, for whatever reason, then the cycle reverses itself. Fewer jobs mean less money and less money spent means less jobs and fewer jobs mean less money and ... you get the idea. Ok, enough of basic economic thought.
An important fact in our economic system is that we have three primary sources of money in our economic system: (1) the Consumer, (2) Businesses, and (3) The Government. A quick look at these three sources of income.
(1) The Consumer - that's you and me. We the people are the ultimate source of all spending. When we don't spend, businesses don't have money to spend. When we don't spend, government tax income is significantly reduced. In the past, it is the consumer that has helped keep the economy afloat. A look back at economic history will show instances when the consumer spending is credited with keeping the economy going when other aspects were faltering.
(2) Business - Big or small business, business is business. Business spending for materials and supplies creates jobs for those manufacturers. Spending by businesses is an important part of our economy, at least in the past it has been. Of late, businesses more and more,as we all know, are sending jobs overseas. the issues is that businesses do not care about america or any other country. Businesses are apolitical. Businesses function to please their stockholders and ensure their own survival. Businesses truly have no interest in economic recovery other than how it affects their own business.
(3) The Government - Our government, unlike many others, exists to provide for the well being of its people. Sounds easy but go watch the move "Bruce Almighty". There is a scene where God's fill-in (Jim Carey) discovers he can't please everybody, one person prays for no rain when they go on a picnic while another person prays for rain for their crops in a drought. You get the idea. Likewise, it is virtually impossible for the government to please everybody at any given moment. We are a vast cross section of humanity with a wide variety of beliefs and values - and that is part of what makes this country great.
The government collects money from the people and redistributes it via various channels of programs ranging from the military to highway funding or funding for various education programs. The government also has the unique power to create money which can be a dangerous thing. Witness the rise of Adolf hitler prior to WWII. Germany was undergoing inflation such as we can only imagine, the price of bread was changing so fast daily that signs were never current. The problem was the government was "solving the problem" by printing more money. The faster they printed money, the faster inflation rose because each day, the Mark was worth less and less. (The more there is of something, the less valuable it has). America's Federal Reserve system regulates the amount of money supply through interest rates and other means. This power to regulate money is not a direct cause and effect power as the Fed can raise interest rates but if consumers and businesses continue to borrow money at even higher rates, the desired effect of the Fed is not realized.
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So let's discuss what it will take to get the 2012 economy turned around. It was consumer spending that helped alleviate the initial impact of the 2007 -2009 (?) recession. Consumers spent on credit. And business liked it. Businesses today often make a better profit off their credit card operations than they do their merchandise. think about the last time you went to a store and the sales associate offered you a credit card. One major retailer charges 26.99% on their credit card!! No wonder they want customers to get one. They don't have to ship or handle returns on credit cards, only collect the money each month. (By the way, don't get mad at the poor clerks, they are only trying to keep their jobs and meet insane quotas the companies have laid out). Credit cards are great profit makers.
But as the value of homes dramatically declined, and jobs were either lost or became insecure, consumer spending slackened. People looked at those credit card charges and wisely decided to pull in on their spending. And so one of the three main sources of spending in this country dried up. And it will remain dried up until people have worthwhile jobs, not the part time, no benefit jobs far too many are stuck with today. Far too many people have jobs with no vacation, no health insurance, or any other of the benefits we have enjoyed during previous periods of prosperity.
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So with no consumer spending, where is the economic stimulus going to come from? Ah-ha you say, business, business, big business will fuel it with their spending. First this runs contrary to previous recoveries as small businesses have led the way out as individuals / entrepreneurs and small companies take chances and start up. Individuals tired of trading their time and lives for the companies money decide to do something they have a passion for and start new companies creating new jobs.
But still, won't big business with all that money be a significant factor in the economic recovery? Sadly no. If there is any evidence of it, nobody has seen it to date. Large corporations are sitting on vast sums of cash and are unwilling to spend it. During discussion of the Federal Deficit Limit this past spring, it was announced that Apple Corporation (no longer named Apple Computer) has more cash than the United States Government! Are they spending that money on crating jobs and prosperity in this country, the country they were founded in and are headquartered in? NO! They spend their money in third world countries hiring people to work in conditions this country would not allow. Some say people in this country are not willing to take certain jobs. Perhaps true to a degree but many jobs have been sent overseas because they could not exist in this country.
Again businesses really don't care about economic recovery other than the impact it makes to their bottom line and the stockholders. Currently they are not spending to acquire skilled employees and train them but instead are shipping our jobs overseas to be conducted in substandard conditions to allow for more profit. That said, is there any reason to believe that there will be any sudden generosity or outpouring of patriotism and thus spending at the business level to create jobs and prosperity in this country?
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NOTE: When we export out jobs overseas, we import their poverty. Don't believe it? Think about how many times you have called a company on the phone only to have somebody from India answer. Look at the improvement in their economy while ours gets worse every day.
NOTE: When businesses lay off their employees, they are also laying off their customers. A corollary to this is that when businesses refuse to hire full time employees, they are stifling their customer base. How many retailers currently have employees that do not qualify for a credit card with the company because of the amount hey are paid? I know of many people with good credit ratings who cannot qualify for a company credit card because their pay is so low.
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So if the consumer is exhausted and broke, thus unable to contribute significantly any longer to the economic recovery and business are unwilling to spend and hire (at least in this country). Where is the spending for economic recovery coming from? The only option left - The Government. While some consider the government an evil thing, it is still necessary for the well being of the people. And it is government spending that will have to lead us in this recovery just as it has so many times. A quick look back at economic history will show that major economic recoveries tend to occur due to government spending. Look at the Great Depression, many economists agree that FDR's programs helped maintain the economy and kept it from degenerating even more but the major cause of economic recovery from the Great Depression was WWII and the government spending on planes, tanks, and bullets that created jobs and prosperity.
The opposite side is seen in our withdrawal from the Vietnam war. President Nixon had stated that withdrawal from the war would have a economic impact on our country and it did. As we withdrew from the war, the early 70's recession started. Just at the war ended in approximately 1973, the recession was nearing its peak. And just like today, the recovery was slow in coming even after the recession "officially ended".
Back to the positive side of government spending and recovery. The United States had its greatest increase in the National Debt under President Ronal Reagan (1981 - 1989) Under President Reagan, the debt increased 189%!! What were the causes of such a huge debt increase? Basically, Government spending. President Reagan spent money, especially on the military, building it up. We stared at eh Russians eyeball to eyeball and they blinked. President Reagan gave his famous statement, " Gorbachev, tear that wall down!" and the Soviet Union did. Why? Because we out spent them plain and simply. We spent more on our military and we flat out spent them to the point they were broke and could not sustain their posture anymore.
Unfortunately that type of spending is unsustainable by any government and we too had to back down and significantly reduce our spending with the resultant recession once again. Go ask President Bush about the economy. A popular phrase during his administration was "Its the economy Stupid!" In the end President Bush had been dealt a bad hand to start with. We had to back off on our government spending and the took over just as it began. Forces far beyond Republican and Democratic policies and plans acted to once again put our country into a recession or significant economic downturn.
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SO what does this mean for us today? To Summarize, the consumer is drained financially and emotionally. Business are not willing to spend to create jobs and recovery (at least for the moment). So the burden is upon the government to spend to create jobs. But the danger is they cannot spend too freely or they run the risk of fueling inflation again. It is a delicate balance of spending without sending inflation rates through the ceiling. Also complicating the issue is that we are a world wide economy more than ever before. Witness how events in Greece and Spain among other countries have had significant impact in this country.So when you hear people bad mouthing the government and how e have to cut government spending, realize that cutting government spending is exactly what is not needed at the current moment. In the short term we have to have increased government spending to fuel job creation but it must be carefully monitored to prevent fueling inflation. In the long term, government spending must be decreased as we cannot maintain continued growth of the national debt. But it has to be done slowly. We got into this mess over a long period of years. It is naive to think we will get out of it quickly. It will not happen in the next administration of even the one beyond that but it must be done. And so we are left in a situation akin to having a snake pop up in your car while crossing a bridge. You want to put one foot on the gas to hurry up and get off the bridge so you can get out of the car and you have one foot on the brake as you need to stop now! The days ahead require sound economic judgement in our leadership. We need increased government spending for now but decreased government spending in the long term future.
