Consumers Should Be “Too Big to Fail”

November 10th, 2010

By Dr. Jim Taylor

As distasteful as it was to see the financial, insurance, and automotive industries bailed out for their greedy and reckless behavior, it seems clear that President Bush’s and President Obama’s decisions to do so were correct. Allowing the “too big to fail” companies to fail, however much they deserved to die a slow and painful death, was tantamount to an economic catastrophe.

But there is another even-larger sector of our economy that deserved the same designation of “too big to fail,” yet has been largely neglected by the federal government. I’m talking about consumers. Consumer spending accounts for about 70 percent of America’s GDP, so the “little people” are the real engine of our economy. You wouldn’t know it though by the federal government’s rather pathetic response to stimulating the economy.

The $786 billion stimulus package was a lukewarm attempt to do just that; the majority of mainstream economists agree that it kept the train from derailing, but it was insufficient to get our economy rolling along at high speed again. There have been other attempts to get the economy chugging along again by, for example, extending unemployment benefits and offering tax cuts to spur businesses to hire, but the former aren’t sustainable (and businesses know that) and the latter don’t offer sufficient incentive (because demand shows little sign of picking up). But there wasn’t the political will to do more. Republicans decided that the federal deficit (or obstructing any and all Obama initiatives) should take priority over getting the economy humming again. Democrats were more concerned with the recent midterm elections (and look what good that did them) than showing some backbone in support of their suffering constituents.

All the talk now is about lower taxes, encouraging investment, and getting businesses to start hiring. Yet these attempts seem to ignore a few basic tenets of free-market economics that cause a giant catch-22 even a layperson can’t miss. Until more consumers have jobs (or don’t fear losing the jobs they have) and regain the confidence that the economy is going to recover, they are going reduce their spending to a bare minimum and sit on the money they have because they can’t count on getting more in the future. At the same time, businesses are expected to hire new workers to create those jobs that people need so consumers will then start buying stuff to jumpstart the economy. But any businessperson worth his or her salt would be crazy to expand unless there was increased demand for their goods or services. But there isn’t any demand because consumers are either broke or saving what they have rather than spending because they have either lost their jobs or are afraid they will lose their jobs. You see the vicious cycle and circular mess we are in.

It doesn’t require a Ph.D. in Economics (or Psychology, for that matter) to see the obvious: The way to get the economy going is to view consumers as too big to fail and get money into their hands so they can start spending again. With more demand, businesses will be motivated to hire more workers which, in a virtuous cycle, will put more money in consumers’ pockets who will then use that money to buy more stuff, which encourage businesses to expand, etc., ad infinitum.

As has been discussed widely, the seemingly obvious choice is for the federal government to create jobs. But how best to do that? One of the most widely discussed options is to create a Manhattan Project for our country’s infrastructure because it kills three birds with one stone. Tons of jobs would be created in the private sector. The impending national disaster, comprised of deteriorating roads, unsafe bridges, an antiquated electric grid, and crumbling waterways, would be averted. And the foundation would be laid, both economically and structurally, for continued growth deep into the 21st century. Yes, it will add to the federal deficit, but it will also provide much needed fuel for the engine of our economy that is now sputtering on fumes, but when rolling along again at full speed will be capable of paying down the deficit.

Clearly, putting money into the pockets of consumers isn’t a panacea for all that ails our country economically now. And we do need to focus on reducing the deficit once the economy reaches a downhill section of track. We will likely need to — No, don’t say it! — increase some taxes and cut spending (anyone who thinks the budget can be balanced with just spending cuts is living in Neverland). But it is a step in the right direction. And it would also provide a boost beyond the economic benefits to the “little people” because it would show us that our government understands that consumers are too big to fail and that it actually cares about us rather than just “giving love” to those who just filled their campaign coffers.

The $64,000,000,000 question now is, with the midterm elections behind us, are the Democrats and Republicans ready to work together and find a solution (even if it doesn’t reach the level of their respective ideological purity tests) that would actually put the interests of their constituents ahead of political mud wrestling? I’m not holding my breath.

(This article was also posted at Dr. Jim Taylor’s Blog.)


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13 Responses to “Consumers Should Be “Too Big to Fail””



  1. d |

    No,they will never,work together. I agree with your thoughts,Dr.Jim.
    A government big enough to give you everything you want,is strong enough to take everything you have,as Thomas Jefferson,said. This mess can’t be fixed by one party,it will take time and votes. Too many of either party is bad,but equal amounts causes a standstill. Seems, we the people,can’t win for losing.


  2. Tom Carter |

    Jim, you’re hitting every nail square on the head. We have to get the budget and the debt under control by reduced spending and reasonable taxation, and at the same time we have to solve the jobs problem. Consumer spending is the driving force of the American economy, and if people don’t have money and some degree of confidence in the future, consumer spending will just dry up.

    Some might feel that spending money on infrastructure at a time we have to reduce spending is contradictory. Not at all. Bridges, highways, and railroads (in that order) are in bad shape, and money is going to have to be spent to change that. Spend it now, when jobs are so desperately needed, and we’ll see a return in increased consumer spending. We’ll also be able to stop the unacceptable level of infrastructure decay.

    The knee-jerk response of conservatives will be to decry government spending to create jobs and economic activity. In this case, it’s justified and it will work. The fact that it doesn’t create long-term business activity is offset by the facts that it gets important work done, creates jobs when they’re badly needed, and gives a boost to construction and related businesses — many of them small businesses — which need it.

    As to the question in your last paragraph, I’m not holding my breath, either. The problem, though, lies with us, not with ineffective, self-interested politicians. A big step was taken last week when we threw a lot of the rascals out, and we have to do it again in 2012. Maybe they’ll get the message when they keep losing their jobs. And I’m not a partisan Republican — far from it. I’d be just as happy to vote in Democrats, as long as they prove that they deserve to be elected.


  3. Brianna |

    I’m afraid I have to, in the words of Tom, have a “knee-jerk reaction” to these completely false premises. You say we should give money to consumers so they can spend it. But all wealth must come from somewhere, and the Federal Government cannot create it. All the government can do is redistribute wealth, either through taxation or money creation. Taxation gives wealth to some by directly taking it from others, and money creation garners its wealth by leaching wealth from the already existing money supply, so that the worth of your savings and capital are destroyed by inflation. The only real way to beat inflation is through the purchase of assets whose dollar value will keep pace with or exceed inflation, which is why you do see a short boost in the economy after a round of “Quantitative Easing.” Look at commodity prices now, they have been rising and they rose faster after the Fed’s decision to engage in QE2 last week. This is because people are purchasing things with their dollars before those dollars lose their value. But in the long run, all your QE will do is spur malinvestment and misallocation of resources by driving the economy in ways other than those which are best for the long-term productivity of those resources, and you will pay for it with a worse slump down the line once your false boom is over.

    You and Tom both deride the idea of principles as some sort of detriment to efficacy, but the simple truth of the matter is that principles become principles because they work. Yes, you can sometimes gain by violating your principles in the short term. But if violating your principles works once, it will only tempt you to violate those principles again and again, and eventually you WILL get burned. Maybe nobody will catch you if you cheat on a test once, but if you think you can get away with it and you keep doing it… they will. If printing money created wealth, Zimbabwe would be the richest country in the world. After all, everyone in their country has been given trillions of dollars by their government; how come they’re not all rich? Or if you want a less “extreme” example, look at Japan, who has been keeping its interest rates at effectively zero for nearly 20 years:

    ***

    Beginning in 1991, Japan experienced a financial crisis that has been documented and studied by many. Japan’s crisis was triggered by a real estate and equity price bubble followed by a collapse of equity and real estate prices. But unlike the examples I cited above, Japanese policymakers met the crisis with prolonged denial and then, when conditions forced recognition of the severity of the problem, very halting steps to address it. Banks were not forced to recognize the condition of their balance sheets and were encouraged to continue lending to firms that were themselves unprofitable. Anil Kashyap labels these “zombie firms.”

    Zombie banks continued to direct capital to zombie firms. This charade continued for more than a decade, with the result that the once-powerful Japanese economy was completely stagnant for that period. The government’s main response was to dramatically increase spending on infrastructure and frantically try to get Japanese households to save less and consume more. The resulting “lost decade” of economic growth cost Japan more than 20% of GDP.

    Does any of this sound familiar? Can you connect the dots?

    http://www.forbes.com/2009/02/10/recession-tarp-japan-opinions-columnists_0211_thomas_cooley.html

    ***

    Malinvestment in the name of saving important firms, increased spending on infrastructure, and encouragement of consumption did not save the Japanese economy, and they will not save ours (Paul Krugman’s words notwithstanding). Getting government out of the economy and letting individuals and firms take care of their own problems, though painful in the short term, is the only real, long-term solution to our problems.


  4. Tom Carter |

    Brianna, I’m not aware that I derided the idea of principles, whatever that may mean. Is that the same as not agreeing?

    To put it simply, repairing and rebuilding the national infrastructure, now in bad shape, will largely be done mostly with federal funds, just as it was originally built and is maintained mostly with federal funds. There isn’t any other way it will happen. The work will be done by many companies, mostly in construction. They will hire many people. Those people will no longer be jobless, and they and their families will spend their money. That will create demand, resulting in more production, purchasing of materials and inventory, and hiring. All that will result from doing what we have to do anyway. The simplicity may be obscured by thick economic philosophies, but simple it is.


  5. Dr. Jim Taylor |

    @Tom: Thanks for taking up Brianna’s response. I couldn’t have said it myself.

    @Brianna: I just respectfully disagree with your premise and arguments.


  6. Dan Miller |

    Paying people to work is better than paying them not to work, and the infrastructure could use some improvements. That said, what improvements? How do we avoid “bridges to nowhere,” pretty new/remodeled airports with no travelers and other earmark projects of little value other than to the folks working on them and to the Honorable Members who authorize them? Are there “shovel ready” projects? They seem difficult to find; where are they hidden?

    If infrastructure projects can stimulate the economy beyond putting money in the pockets of some and votes in the pockets of others, I’m for them. Hiring lots of people to dig holes and lots of people to fill them is not very appealing and seems likely to lead to inflation, making the money in the pockets of all of us less valuable than currently. If projects do not improve the infrastructure in ways which are likely to stimulate the economy beyond that, I’m not for them.

    Better roads could reduce transportation costs, nuclear power could reduce energy costs and reducing regulatory hurdles for business could do both. Focusing on useful infrastructure projects should work most effectively were the regulatory hurdles diminished. Otherwise, it seems of little if any value.


  7. Dr. Jim Taylor |

    @Dan: Though it may not be a reasonable assumption, we must go under the assumption that an infrastructure project would, in fact, rebuild needed infrastructure.

    BTW, a very good read here on the Bush tax-cut battle:

    http://www.huffingtonpost.com/david-fiderer/the-bush-tax-cuts-and-the_b_781419.html


  8. Tom Carter |

    Dan, one of the most important reforms that would help ensure that infrastructure projects are real, necessary, and useful would be to ban congressional earmarks. This, of course, was one of Obama’s empty campaign promises, and it’s one of the many failures he should be held accountable for in 2012.


  9. Dan Miller |

    Jim, I find it difficult to proceed on the basis of assumptions which are not reasonable. Tom’s suggestion would do quite a bit to make your suggested assumptions reasonable, and we ain’t there yet.


  10. Michael |

    it doesn’t require a Ph.D. in Economics (or Psychology, for that matter) to see the obvious: The way to get the economy going is to view consumers as too big to fail and get money into their hands so they can start spending again. With more demand, businesses will be motivated to hire more workers which, in a virtuous cycle, will put more money in consumers’ pockets who will then use that money to buy more stuff, which encourage businesses to expand, etc., ad infinitum.

    All the demand in the world won’t work if no one is able to produce.I want a starship and am prepared to pay good money for it, so where is it already is the logic you’re tying to portray here

    To put it simply, repairing and rebuilding the national infrastructure, now in bad shape, will largely be done mostly with federal funds, just as it was originally built and is maintained mostly with federal funds. There isn’t any other way it will happen. The work will be done by many companies, mostly in construction. They will hire many people. Those people will no longer be jobless, and they and their families will spend their money. That will create demand, resulting in more production, purchasing of materials and inventory, and hiring. All that will result from doing what we have to do anyway. The simplicity may be obscured by thick economic philosophies, but simple it is.

    It would be plausible…. but in fact, there is so much graft, waste, etc. in highway projects (or just high standards that make them ridiculously expensive to build) that much of it amounts to makework. Or a lot of “transportation” money ends up going into mass transit to appease the enviros…. and ends up being wasted; cars are far cheaper.

    For example, in Colorado, there are many bridges that are just barely wide enough for the two lanes of traffic–no shoulder. It’s a priority to replace these as they are “substandard”–in addition to those that are actually crumbling. Of course it’s nearly twice as expensive to build a new bridge with shoulders as one without

    we must go under the assumption that an infrastructure project would, in fact, rebuild needed infrastructure.

    Not in the US we don’t ; an infrastructure project would have all the features I mentioned.


  11. Clarissa |

    ” That said, what improvements? How do we avoid “bridges to nowhere,” pretty new/remodeled airports with no travelers and other earmark projects of little value”

    -There is this great plan to build a high-speed railroad between St. Louis and Chicago with federal funding. It will bring many jobs to the area and facilitate travel between the two cities. The President promised this to our area and I do hope he makes good on the promise.


  12. Brianna |

    Tom, I make no judgment on whether or not infrastructure should be rebuilt, and I agree that if it is done, it has to be done with federal funds. What you are ignoring is that the money has to come from somewhere, and the only place it can come from is other people. Government cannot give money to people, whether as wages or a gift or a tax rebate, that does not come from other people in the economy. Certainly those who receive government wages will spend that money, but it will not be a net infusion into the economy, because in order for that money to be given them, it had to be taken from other people who will now NOT spend that money on whatever they were planning to spend it on, whether consumer goods or starting a business that would have created jobs. So by all means, build the infrastructure if you think it is necessary. But don’t pretend that by doing so, it will bring a net boost to the economy. Government spending is like taking water out of one side of a pond and pouring it into the other. At best, the water in the pond stays at the same level; at worst, much of the water slops out of the sides of the bucket during the transfer.

    As for my saying that you are deriding the idea of principles, Jim said:

    “are the Democrats and Republicans ready to work together and find a solution (even if it doesn’t reach the level of their respective ideological purity tests)

    and you said:

    “The knee-jerk response of conservatives will be to decry government spending to create jobs and economic activity”

    that knee-jerk reaction assumedly being due to being too rigidly inflexible with regards to ideology. Certainly you have viewed both Brian and myself as too logical in our extrapolation of principles to practical action before, just as Jim has.

    Finally, I view it as ironic that even as Jim decries ideology, his entire article is based on the logical fulfillment of a principle introduced by the government when they bailed out the banks and the economy. After all, if Bear Stearns gets a bailout, why shouldn’t the consumer get one as well? If JP Morgan is too big to fail, why aren’t you or I? That is exactly why I do not believe anyone should have gotten a bailout in the first place, because once you have started, where do you stop?


  13. Brian |

    Dr. Taylor, if the consumer is too big to fail, why not just have the Federal Reserve print up, say, $100,000,000,000,000,000,000 (100 quintillion) and distribute that money equally to every man, woman, and child in the United States? That would give us all about $333 billion apiece. Surely we could spend our way to prosperity and jobs if we all had that kind of money.


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