Spending will build recovery

By Alan Ginsberg, Special to the BDN
Posted Aug. 19, 2009, at 7:21 p.m.

Saving money is good for the economy except when it’s bad for the economy. Right now, it’s bad for the economy.

Consumers have been saving more and spending less. Unless we begin to spend more, there will not be a true economic recovery. So Congress should create a program of vouchers that would increase consumer spending.

Anyone paying attention knows that the U.S. economy is in the worst shape it has been in since the 1930s. The recession started more than a year and half ago. The unemployment rate is over 9 percent and likely will remain that high until at least late in 2010. Hunger and homelessness are on the rise. Most states are in a downward spiral because of falling tax revenues and increased spending for those in need.

Data show that conditions have improved recently. The financial system, on the brink of collapse last fall, has stabilized. Economic growth is declining at a slower pace. Unemployment may be stabilizing, but remains dangerously high.

But until consumer spending increases a great deal, the economy will be weak. That’s because consumer spending accounts for more than two-thirds of the nation’s economic activity.

President Bush tried to boost consumer spending by issuing tax rebates of $600 to most Americans. Because President Obama’s recovery plan includes a tax cut, Americans are getting more in their paychecks.

But instead of spending this extra money, people have been saving most of it. The personal savings rate has increased dramatically since the recession began. So consumer spending consistently has fallen. It rose a little in June, but, accounting for inflation, actually fell. Retail sales declined more than expected in July.

Facing the real possibility of being laid off or suffering a pay cut, saving that extra $10 or $20 in each paycheck makes sense. But it doesn’t stimulate the economy.

With consumer spending so low, a recovery will be anemic. The overall numbers might be better, but far too many people will be without work. Far worse, there could be a “double dip” recession.

To fill the biggest gap on the road to economic recovery, Congress should provide vouchers that would be used to pay for goods and services. Those receiving the vouchers could spend them at any legitimate business. The only restrictions would be that the vouchers could not be used to pay existing debts, put into a savings account, or to buy a financial instrument.

To guarantee that spending would begin quickly and to prevent hoarding, the vouchers would have an expiration date.

No government program, whether spending money or cutting taxes, fully pays for itself. But the vouchers probably would be partly self-financing. Business profits would rise, and so would tax revenues. Businesses would order more goods to replenish their inventories. Increased economic activity would lead to more hiring. Newly hired or rehired workers would pay more in income taxes and not draw unemployment compensation.

A suggested framework: In September, the vouchers program would pass. The vouchers would be valid from Thanksgiving through Valentine’s Day.

Profits would increase for businesses that depend heavily on holiday spending. Individuals would have more resources for holiday and winter spending. The post-Christmas slump would be less severe.

Because federal deficits are so large, the initial amount of the vouchers would have to be modest. But even a few hundred dollars per family would be enough for such things as holiday gifts, groceries, winter clothes, or some evenings going out for dinner and a movie. Enjoying use of the vouchers, some individuals probably would spend some of what they have saved.

By spring, the program’s likely success would be apparent. Then Congress could provide a second set of vouchers. With the November elections approaching, lawmakers would be less concerned about deficits.

Actions in the last months of the Bush administration and the early months of the Obama administration have helped prevent a full-blown economic collapse. The voucher program would help bring about a full-scale recovery and better conditions for millions of suffering Americans.

Alan Ginsberg of Corea was a professor of history and political science in Texas. He has taught at Eastern Maine Community College and University College of Bangor.

http://bangordailynews.com/2009/08/19/opinion/spending-will-build-recovery/ printed on August 21, 2014