Creating Demand

After lengthy consideration, I’m inclined to accept a key argument about the persisting economic malaise infecting the United States.  The big problem is demand — no one is willing to buy stuff, so no one is willing to make stuff.  This thought comes after reading this post, though I do wish the author and several others who share his political views could manage to make their arguments without cussing us out at the same time.

I still think that concerns about the massive debt load carried by the government (and escalating dramatically going forward) are valid.  But ultimately, that is a question about how to create and sustain investment.  That’s a long-term problem.  The short-term problem is demand.  And with the economic house still on fire, the short-term problem takes precedence.

Liberals have been saying this for months.  So I guess they win the argument, right?

Wrong.

No one has yet provided a decent idea on how to create demand.  The liberal argument, championed by the vitriolic-but-at-least-not-vulgar former economist Paul Krugman, has been more “stimulus” spending by the government.  Krugman and his supporters were never satisfied with the $800+ billion 2009 “stimulus” policy, arguing that it was far short of what was really needed.  Now that the programs authorized in 2009 are slowly petering out, they’re demanding a new “stimulus” package.

Trouble is, they’re not explaining how it will create either sufficient or sustainable demand.

The key question no one is asking why isn’t anyone buying?  The implicit (and thoroughly unexamined) assumption on the “stimulus” side is that no one is buying simply because they don’t have the money to buy.  Throw piles of money into the economy through government “stimulus” programs (preferably targeted towards the poor), and viola you get demand.

But the evidence is quite weak.  Most of the last round of “stimulus” wound up getting socked away, by banks, by businesses, and by consumers.  Banks shored up their reserves, hoping to correct the errors of inadequate reserves that killed Bear Sterns and Lehman Brothers and almost killed Citigroup.  Businesses paid down debt and horded cash, guarding against continuing depressed demand and the prospects of expensive new government mandates, including the health care “reform” and financial “reform” packages.  And consumers — the all-important engine of the American economy — show few signs of wanting to spend money rather than paying down their own sky-high debt loads.

That means any next round of “stimulus” has little hope of doing any better than the first round.  The issue isn’t size, like Krugman and his compatriots insist.  Their causal mechanism is not well-considered and looks like it might just be inapplicable.

And we should at least debate the question.