The chief savior for the United States in this economic, financial and banking crisis, aside from China of course, will be the American consumer. If the United States' economic growth is to resume, there is no possible substitute for American consumer spending. It is the average US family budget that is the ultimate object of all government plans and business investment.
The chief economic justification for the Washington stimulus package is that it will replace jobs and income lost through the destruction of employment and the reduction in available credit. The vast increase in government debt will be incurred, economically speaking, to restore part of this vanished consumption. In theory, Federal spending is designed to fill the so called ‘output gap’ between the goods and services that the economy can produce and the amount that is actually being purchased by consumers.
However, the government funded jobs in the private sector and the cash transfer payments will disappear as soon as the stimulus funds are exhausted. The only permanent jobs stemming from the stimulus are likely to be the ones in the new and enlarged government bureaucracies.
The object of business investment is the satisfaction of consumer demand. Without a reasonable expectation of future, sales businesses will not invest, they will not increase capital spending and they will not hire new workers.
The stimulus is intended to support consumer spending by distributing money to consumers through jobs and transfer payments. These payments in turn should help businesses maintain output, reduce the number of workers fired and interrupt the downward cycle of falling consumption and redundant workers. But unless the economy begins to generate jobs, unless consumption rises from current levels, businesses are unlikely to invest based on the stimulus spending alone.
The question of whether the US economy will return to growth rates of 3.0% and 4.0% turns on the consumption habits of the US consumer not on Federal spending. No government, not even one possessing the world’s largest reserve currency, can disburse enough money to replace the average unremarked consumer. It is the everyday decisions of American households that matter, not the grand schemes of Washington.
The basic assumption of the US government economic policy is that, as far as the consumer is concerned, nothing has changed. When credit, jobs and confidence return, then the American shoppers will resume their old free spending, credit happy ways and the US economy will boom again. This assumption is necessary to justify the budget projections of the Obama administration but it imagines that the average consumer views debt in the same light and with the same insouciance as the Federal government itself.
The difference in attitude is striking and is produced by the difference in consequences. For the individual family debt is a serious matter. Households cannot borrow to fund operating costs for the simple reason that, beyond a very limited amount backed by assets, no one will lend them the money. Bankruptcy is a difficult option; the consequences of economic failure for a family are real and painful.
Not so for the American Federal Government. Washington has advanced so far into profligacy because there have been, at least so far, no consequences. The markets have not punished the government with higher rates for its debt, and voters have not punished the elected officials by removing them from office. Where there are no consequences for dangerous behavior there will be no change in behavior.
The American consumer has undergone a profound economic shock. Losing one’s home or job, or watching 20 years of accumulated wealth halve in a few months are facts. They are the real consequences of unrestrained consumption and debt and they will impose powerful limits on consumer spending for years to come.
The danger for the US Government and the dollar is that the enormous increase in the Federal debt will not produce robust economic growth within eighteen months; deficit spending cannot force recovery because its basic economic assumption of the unchanging American attitude toward debt and consumption is false. World markets will take a very different view of US indebtedness and deficit spending in a year and a half if the American economy is mired in 1.0% growth. The consequences for the US economy, the Federal Government and the dollar will then become very real.