The American Economic Mess

Robert Reich has a blog where he posts his musings. His latest looks at the US economy and he estimates what it will take to get the US out of the current slump. It is well worth your time to read the whole thing, but here are the key bits:

The core problem lies on the demand side. American consumers, whose purchases represent 70 percent of the economy, do not have the purchasing power to maintain overall demand for American goods and services. Businesses will not invest unless consumers are able to buy. Exports cannot possibly fill the gap. Inadequate demand is forcing the private sector to lay off large numbers of workers, which, in turn, is further reducing the buying power of consumers. In 2008, 1.9 million jobs vanished -- the biggest drop in non-farm payrolls in thirty-four years. We are caught in a vicious cycle.

As the buyer of last resort, the federal government must respond if that cycle is to be reversed. In my judgment, this will require a stimulus of about 6 and a half percent of gross domestic product, or a total of some $900 billion, spread over two years. That’s my estimate for the shortfall in private demand.

...

Overall, the federal government’s responsibility for restoring aggregate demand is at least as great – arguably, far greater – than its responsibility for rescuing the financial system and helping U.S. automakers restructure. Without adequate demand, credit markets will continue to be frozen and major American industries will languish. Yet there is no ready formula for how the federal government should proceed because we have not been here before.

This largest and most serious economic downturn in more than sixty years will require both a willingness to try new policies and to change course if those policies appear to be ineffective relative to their costs. The danger is not that the federal government will do too much but, rather, that it will do too little.