Monday, January 14, 2008

Americans face a consumption-driven Recession by pulling back on consumption

Americans, staring a consumption-driven Recession in the face right after the last piggy bank they had to maintain spending was taken away with the collapse of the housing bubble, are doing the only thing possible. From the New York Times:
Strong evidence is emerging that consumer spending, a bulwark against recession over the last year even as energy prices surged and the housing market sputtered, has begun to slow sharply at every level of the American economy, from the working class to the wealthy.

The abrupt pullback raises the possibility that the country may be experiencing a rare decline in personal consumption, not just a slower rate of growth. Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.

There are mounting anecdotal signs that beginning in December Americans cut back significantly on personal consumption, which accounts for 70 percent of the economy.
The perpetual Republican solution, Tax cuts for the rich, won't work to restore consumption. All they will do is hand more money to invest to the wealthy, who will invest where the returns are highest - outside the U.S. (Krugman points out that Obama's only prescription for the Recession is a tax cut. At least both Edwards and Hillary are economically competent, unlike Obama and the Republicans.)

The fed has already announced informally that they will lower interest rates again, but the resulting inflation will shortly wipe out any gain because lenders will raise interest rates to counter anticipated inflation.

Paul Krugman points to both Edwards and Hillary for their fiscal stimulus plans. First from Edewards:
last month, before the economic consensus turned as negative as it now has, he proposed a stimulus package including aid to unemployed workers, aid to cash-strapped state and local governments, public investment in alternative energy, and other measures.
and then Hillary, in response to Edward's proposal came out with
a broadly similar but somewhat larger proposal. (It also includes aid to families having trouble paying heating bills, which seems like a clever way to put cash in the hands of people likely to spend it.) The Edwards and Clinton proposals both contain provisions for bigger stimulus if the economy worsens.
As the economy continues to get worse and the election gets closer, this is going to become a larger and larger issue for all the candidates, and who ever become President is going to have to deal with this Republican-created and worsened Recession for quite a while.

Right now it is enough just to recognize that the consumers, who have been the mainstay of the American economy since 2001, are now finally pulling back on their spending, there is nothing in place to replace them, and most of the politicians who are even slightly aware of the problem have no clue regarding what might work or why.

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