Barack Obama is faced with a monumental task: Rebuilding the US. Really, I think that is what it amounts to. Rebuilding and reasserting the core values of the nation – placing once more the values of freedom, dignity, and human rights back into everything the government is involved in, in the US as well as internationally. But also rebuilding an American economy moving increasingly, in more and more sectors, into a deep recession. It is this second part I address here.
It is possible to spend enormous amounts of time and paper to ponder and write about what went wrong. And every day more is produced on this topic. In the past, I have participated in this as well. And indeed, it is important to learn about the causes of the recent demise of the US and world economies. Yet the most important thing to discuss right now is, even so, how to rebuild, not why there is a need for rebuilding.
To my mind, a prominent and highly important feature, and probably the biggest challenge, is lacking consumer demand. For sure, there are others as well, such as rebuilding confidence, making the banking system work again, and so on. However, to me these are secondary factors in the current crisis as well as factors that are hard to influence.
Consumers simply are not spending enough to reverse the decline, that is a crux to understanding how to rebuild. For obvious and rational reasons that need not even be repeated, apart from noticing that a reversal of the wealth effect due to falling housing prices plays a key part, consumer chose not to spend. And this is important, as the housing market in the US may be expected to take a long time to recover – perhaps even a decade. Thus there will be no positive contribution to consumer spending from increased wealth for years to come.
The only way to increase consumer spending currently as far as I can see, is to redistribute. There are sound and compelling reasons to do this. Simply put, a set of policies that redistribute wealth and income to the lower income groups will increase spending due to differential propensities to consume, as J. M. Keynes used to call it, in different income groups. Or, stated differently: Since lower income groups tend to spend a higher proportion of their income, redistribution will increase effective consumer demand.
So to me, and leaving all political preferences for or against income and wealth equality, equity, social political philosophies and such aside – there is a strong case to be made, from an macro economical point of view, for redistribution as a cornerstone in a policy to rebuild America. (I also think future research may well point to the growing inequality, resulting in more and more money being spent for speculative purposes in recent years as a contributing factor to the current crisis.)
Also, while I notice that “talking heads”, industry paid commentators, as well as well meaning opinionated folks all the time voice the opinion that the current crisis will be over in a quarter or so, and have been doing that for the last six months, I think all the evidence points in the direction of a deep and long recession. Given this, the advantage of some types of redistribution policies, e.g. tax cuts for low income brackets, is that they work fast – much faster, for instance, than public spending programs or public works. Tax cuts for businesses, which the Republicans seem to want, on the other hand, are likely to have no impact or at best an insignificant short term impact in the current situation.
So to me, in the current situation, redistribution ought to be used extensively as an instrument to stem the tide of falling demand. There are many other jobs needing to be done, for sure. But this is one of them, and one of the more important ones as well. And it seems very likely, also, that this will one of the approaches employed by the new Obama administraton.
- The American Recession 1: Do Americans Understand?
- The American Recession 3: Blaming Sub-Prime Loans and CDO’s
- The American Recession 4: Reversal of the Wealth Effect
- US Housing Woes Will Continue
- The American Recession 8: A New Great Recession
- America: The Lost Half
- The American Recession and Consumers
- The Citigroup bailout – no principle, no consistency
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