Some bright spots
Rick: Things aren’t all bad. U.S. exports are growing at an annualized rate of 10% to 12%. The BRIC countries (Brazil, Russia, India, China) are expanding and buying more of our products. We can’t stimulate exports more with monetary policy by devaluing the dollar because it’s the world’s reserve currency.
The U.S. economy is shifting from consumption to exports, which is a good thing. We need to stop relying on consumers for economic growth.
Imports have also grown: 29% during the second quarter at a seasonally adjusted annual rate. Consumers must have rising confidence to spend money on foreign goods and services.
Schenk: But imports reduce U.S. economic activity, especially consumer consumption of durable goods. Consumers hunkered down during the Great Recession and saved their money. They wanted to be liquid.
There has been a slight recovery in consumer consumption lately, but we’re coming off a very low base. Weak fundamentals—few new jobs, low income growth, high unemployment, limited access to credit, and low consumer confidence—are restricting sales. We need government deficits to offset low private spending and investments.
Rick: You fail to recognize that many factors support consumer spending. In August, 67,000 new private sector jobs were created. And consumers are fixing their budgets after years of taking on too much debt and not enough savings.
Plus, there has been significant debt reduction due to mortgage refinancings. Many Americans have refinanced their homes due to low interest rates, which frees up cash flow.
Schenk: You neglect to say that we had a net loss of 95,000 jobs in September. And consumer credit outstanding is dropping by $5 billion to $15 billion per month. That’s the fastest pace of deleveraging in the history of the U.S.
We need public borrowing to offset some of this consumer deleveraging. When consumers pay off their debt and don’t spend, the economy slows down. The government should be borrowing and spending to get the economy going.
Rick: We need deleveraging. Consumers built up too much debt from 2003 to 2007 and it’s time to pay this off.
Schenk: Banks could help. They’re sitting on $1.1 trillion in excess reserves. The Fed is trying to stimulate the economy by buying bonds from banks and injecting cash in them, but banks are just sitting on the cash. Let’s spend it to prevent a double-dip recession.
If banks don’t want to lend money to the private sector because they’re worried about defaults, the government should step in and borrow some of this money to build new roads, bridges, and highways. Let’s put those unemployed carpenters, construction workers, and electricians back to work.
Rick: We just need time. We need to give employers time to start hiring during the next few quarters. Then tax revenue will rise, unemployment benefit payments will fall, and the deficit will decline.
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