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Spend spend spend (who, me?)

Martha Olney, adjunct professor of economics | October 9, 2009

When no one buys what you produce, you lose your job (or, if you own the company, your business).  The U.S. economy has suffered millions of job losses because we are not spending enough to keep everyone in their jobs.  Look at Table B-1 of the BLS monthly jobs report and it’s clear:  every industry other than health care has lost jobs in the last year.

So in a sense, the solution is clear:  more spending.  Lots more spending.  More spending for goods & services will put people back to work.  Buy a new house (construction workers get work. So do mortgage brokers and bankers).  Buy a washing machine (durable goods manufacturers get work, as do truckers who transport those machines to Sears’ warehouse and from there to your basement).  Go out to dinner (restaurant workers get work, as do printers who print up that new menu you’re reading).  Pay more taxes (school teachers get re-hired, as do the staff members we eliminated in the department).

“But, wait!” you say.  “Spend more?  Who, me?  I can’t.  Pay cut, furloughs, job loss, job may be lost, 403(b) decimated, house worth less than I owe on it . . . need I say more?”  You’re right; you can’t.  And as that tense conversation at your dinner table the other night underscored, in all good conscience, you probably shouldn’t run those credit cards up any further than you already have because word on the street is that your bank may be reducing your credit card limit soon anyway.

So who can spend more?  Not the state or local governments — their budgets are slashed to the bone due to declining tax revenue.  Not most businesses — they are waiting for strong signs of resumed consumer spending before they pour a lot into new machinery.  Not the rest of the world, which purchases our exports — they have their own problems.   Who’s left?  The federal government.  Politics aside (and that’s a big aside), what the federal government needs to do is direct money to the state and local governments.  Stop the budget cuts at the state level.  Stop the bleeding at the local level.  Get the teachers back to work.  Get the staff back to work.  Who knows:  They may even go out and buy a washer with that first paycheck!

Comments to “Spend spend spend (who, me?)

  1. Professor Olney:
    By the number of comments alone you have sparked a fire storm of outrage.I like the things you say,they hint at the what the solution might look like.But all I read from our elected officials,is cut taxes,cut spending,reduce the value of the dollar to make our products more competitive,which might crate jobs ? poor economics,penalize trading partners with tariffs,trade wars,currency wars.Have the feds send more money to the states,who know what to do with it?,buy new machinery to build what,the things other countries can build cheaper.We are in dire straights,treasury Bills are being bought by the fed to keep the liquidity up.You are and Economist I will ask you the same question I have asked other Economists.What is a living wage $8 hr,$15 hr,$25 hr $75 hr? until questions of these content are answered,no forward progress will be made.3.7% of the work force pays all the taxes.Would you put them in the 3.7% of the upper class,who make 95% of the wealth? I don’t think their could be made a case for that.20,000 Americans make 50,000,000 a year thats in the trillions,yet they pay a tax of 36%,and the middle class pays 32% looks like class War fair to me! but how would I know, I’m only high school educated.

  2. The government is broken. It is no longer by the people for the people. It’s over the people, regardless of the people. Sound familiar? The position of president is slowly moving back towards King. And there’s nothing that anybody is doing about it.

    They spend our money work from home, without our consent. They tax us without our consent. They do not listen, we do not MAKE them listen, and what’s worse? Now they even have made it illegal to dissent… Thanks Patriot act. You’re awesome.

  3. Yes, the federal government controls the purse strings but just blindly spending money isn’t going to do the job this time. The Bush stimulus (that everyone seems to have forgotten about)where everyone just got a $600 check didn’t move the needle on an economy falling into recession.

    The Obama stimulus could have done a lot more, but politics being what they are there were so many ear marks and diverted funds that it became a shotgun round as opposed to a laser that we really needed.

    This recent earnings season is proving that companies are making more money and they are willing to spend more of it. Look at Ford paying down billions of debt the other day and getting scorned for it by Wall Street for not saving it for investment. The more they are willing to spend, the more they will hire and the more people can spend.

    We’ll get through it…

  4. It’s spending that keeps the economy going. You can see everything as a very big web, where all industries need one another indispensably. Without spending, the economy will decline.
    James Locke how to make candle

  5. It’s a vicious cycle that runs the economy anywhere in the world. The companies make the produce, the buyers buy the produce and earn the company some money. In turn, the company buys their raw materials from another company. And so on. It just goes in circles, and yet it gives jobs to everyone.
    James Locke

  6. I think it will be years of pain, even before we are able to relax. This is a worldwide recession and it may take some time to recover. Need to hold tight yet!!

    Regards

    Vance

  7. It is such a fine balance of encouraging people to spend to get this economy rolling and families being unable to spend. People are spending, but you have to look at the sectors where they are tightening their purse strings.

  8. I guess there’s a good thing that comes from spending so much money on material things. But if we spend more to let others have jobs, who will take care of us?
    James Locke

  9. As John said, “Most people I know are afraid to spend (on a new house, car or other big item) at this point because of the uncertainty with their jobs, taxes, and political agendas” seems to me truthful. The Proposal to Immediately Reduce Unemployment in the U.S. (Using FICA Tax Forgiveness to Reduce Unemployment Below 5%) is a good campaign taken by authority. I also agree with Martha Olney, the writer of this article, that federal government should augment budget at state level to resolve the problems of unemployment.

  10. Consumer spending does perk up a gloomy economy. That is true, but seriously, who would want to spend now? Parents with children would rather save now for their kids’ education, food, shelter and not on trips, vacations, and other non-essentials.

    Lauren Danes

  11. Maybe schools might want to emphasize on entrepreneurship. Encouraging students and graduates to start a small business with a small capital. Promoting that entrepreneurial spirit can be one of the areas our educational systems can concentrate on and eventually help in the creation of much needed jobs.

    Erin Leeds

  12. Ideally increased spending by the government is a tool used to stimulate the economy. With greater spending, the multiplier effect takes place and this should lead to stimulation of the economy.
    The question is who is receiving these spendings and are they being used to spend on the capital goods and services or reinvested into businesses so that a snowball effect is created and the economy is stimulated.
    Some how the effect is not seen, instead inflationary effect takes place without much effect to the local businesses. i wonder who is hording all those spending. 🙂
    I for one is investing in myself to not be too dependent on offline work. Hopefully my online business venture works out.

  13. It is true that spending does stimulate the economy but making sure that these funds from consumer spending does circulate within the region is another thing. Buying locally manufactured goods is one spending habit most of us can practice now. Patronizing goods that are homegrown or locally made is a surefire way of creating more jobs and business opportunities that are badly needed during these difficult times.
    Jamie Lore

  14. The same banks we bailed out are cutting credit lines making sure we
    can’t spend. Cable bills and other utilities are going up

  15. Most people I know are afraid to spend (on a new house, car or other big item)at this point because of the uncertainty with their jobs, taxes, and political agendas.

  16. The federal government needs to step it up and help salvage our dying economy. It’s long over do by now. On the bright side people are finding ways to make it work. We’ll eventually get there, it would just be nice to have a little help along the way.

    • Proposal to Immediately Reduce Unemployment in the U.S.
      (Using FICA Tax Forgiveness to Reduce Unemployment Below 5%)

      For all employers with payrolls of more than 15 people, who have laid off employees, who, in turn, have collected unemployment benefits, require those employers to rehire those employees based on the following terms: (1) Hire back at least 1 past laid off employee for every 15 currently working. (2) Rehire using a rule that the longest unemployed worker who has a home mortgage obligation is hired back first (e.g. on basis that employees who have incurred the most personal economic injury are hired back first). (3) The government will then fully credit to the employer the expense of this rehire (including health care) against the employer’s total payroll FICA tax obligation (approximately 1/15th total payroll). Note: This FICA credit loss to the government can be offset by crediting back to the social security system the amount of unemployment benefits the rehired employees would have otherwise collected, e.g. the overall amount unemployment benefit expense to the government is reduced by implementing this rehiring plan.

      In this manner national unemployment could be reduced immediately to the 5% range or better. The mortgage foreclosure crisis could essentially be broken and cured. The resulting improvement in consumer demand from the rehired employees’ increased spending would generally make those rehired employees more needed and useful on the job to their employers as those employers experience generally improved sales. And the cost of lost FICA collections by the government would be more than offset by the lift in general revenues. The downward national debt spiral would be arrested as general revenues immediately rise.

      As the economy stabilizes the FICA credit to employers could then be phased out gradually over time.

      Clearly a FICA tax credit for mandatory employer rehiring is the key which will unlock and open the door to returned prosperity at essentially no economic cost and no increase in national debt, equivalent to Alexander’s slashing the Gordian Knot.

      Compared to the heavy lifting the country has already done to save wall street, this will require negligible effort. There is no excuse for the current 9.5% unemployment rate. All that is required is that our leaders have the imagination, creativity, and fearlessness to stop fearing and to put the country back to work.

  17. Different opinions have been said concerning the financial crisis. This point of view is from an economist. Very interesting proposal. I would like to see the result, but not until I lose all my money.

  18. The writer made it sound so easy. I hope the solution is as easy as that. but try to spend…spend…spend and see what will happen.

  19. You might be helping the economy but make sure that when you spend, you spend for what are necessary and not just wants or else you might be needing a lot of help.

  20. I agree with this post. The government is spending us into the grave. There is no way we can ever get out of this mess!

  21. In the case with spending which the government has also done known as the government spending is to circulate the money to stimulate the economy. However, this has not been successful to all countries who are applying it because the money that has to be circulated within the economy of the country has been thrown out due to a lot of leaks where a huge percentage of that money was put outside the country. As a result, lesser and lesser money stays within the economy.

  22. It’s funny how spending can be both a good and a bad way in that situation. Blames are really going in circle. The question is who will stop it and do the first move to solve the problem. They want us to spend, but how can we when economy crisis is on going and many of us lose our jobs and a huge part of our income. So confusing how we can help through spending given this condition.

  23. I am not quite sure this is the right answer, but this is another view of how we perceive spending. Just try to be clever when you spend money whether you really need it or not. After all, what you are spending is your hard-earned money.

  24. I guess spending is also a good thing. It will give other people more jobs. Our spending can become an income for other people.

  25. Good post. Lots more spending. More spending for goods & services will put people back to work. Buy a new house and construction workers get work. So do mortgage brokers and bankers. Buy a washing machine and durable goods manufacturers get work.
    pedrotovar

  26. Spending is actually good, well, if you have the funds for it. Times like this, it’s time to save for the rainy days. Just buy what you need, and if you have extra funds, then you can buy your wants.

  27. They are waiting for strong signs of resumed consumer spending before they pour a lot into new machinery.

  28. Well, one of the reason Bush sent money to everyone was in order to stimulate the economy and get people to spend. Things were not NEAR as bad then as they are now… Not even CLOSE… So for now I have to put up with workplace harassment from lunatic co-workers, just so that I can HAVE some money to spend… and let me tell you, workplace harassment STINKS!!!

  29. “What the federal government needs to do is direct money to the state and local governments. Stop the budget cuts at the state level. Stop the bleeding at the local level. Get the teachers back to work. Get the staff back to work.” This is such a simple strategy but its a shame that the federal government can’t see that

  30. Spending more would be the solution, but there is this huge vicious cycle that needs to be broken and you would need some sort of synergy at such a big level that it’s almost unachievable

  31. The current state of this so called economy really does get me down. The average hard working person continues to get over-looked as always.

  32. Interesting. I never though about the federal government being the ones to spend the money to get things back into shape. That’s a great idea.

  33. Well, in my humble opinion.. spending is good as long as you have money to spend. Yes, it can actually help more people by merely buying something or hiring the service of someone. But in actuality, not all of us are blessed with lots of digits in our banks. I am all for spending.

  34. Spending more is the solution. More spending to goods and services will put individual to work. And in turn providing more investments will offer employment opportunity that will help to get rid of above mentioned problem.

  35. I’m reading the article and I’m a little angry, because you’re right.

    Here in Mexico, the federal government says there is no money, and we see how many millions in reserves.

    I do not know much about this, may be i am talking nonsense, but how do I get a job, if nobody has money to invest in a job for me.

    Ninel

  36. The US is slowly being bought out by foreign national investors including china, germany, and many other countries. It’s really going to be very difficult to reverse the take over of our economy and world power as we know it. Do a search on “US Treasury Bill China” you will see exactly what I am discussing.

  37. Professor Olney, thank you for your excellent summary and straight talk. I agree with all, including your point that state and local governments should get the help from the fed. Do you think it will eventually happen? And about the need for credit. More credit would boost consumer spending and create more jobs. Do you think the days of easier credit will return? If we are waiting for the big boys to trickle down some credit, I don’t think that will happen. I think credit will slowly evolve from the community level, like cooperative credit unions and micro-lending and micro-banks. They will grow to provide the credit to re-stimulate our economy. And it will be more stable and less prone to predatory behavior. Do you agree?

  38. That’s fine, but I can never understand why so many businesses go down the tube when there is a squeeze on. Sure I know that spending is lower all round, but if margins are that fine that a small percentage change means the downfall of a business, perhaps we also need to examine how we operate businesses.

    It’s slightly off-topic I know, but it’s all part of the mix.

  39. This seems to be a complicated matter but I don’t think it is so complicated at all. Several folks seem to think the Feds can fix this with more taxes and then giving it back. The reality of it is, the more they take the less there is to put out there and keep folks working and goods being manufactured.

    If the Feds would keep their hands out of our pockets we could support our selves and in essence support others. When there are more of those who produce nothing but only take you cannot bring anything out of a recession. Bigger government is not the answer.

    People need to vote for lessor government and lessor taxes if they hope to revive this nation to it’s former greatness.

  40. The answer to this problem is to give back to the citizens what they deserve, and that is to give back their money that that was given to the government through taxes. Proper allocation of the government finances will also help eliminate this problem. Stop budget cut-off. Make new investments that will again offer employment opportunities to the community. Our economy is a give and take relationship between people and the government. If employment opportunities are provided, more people will land a job and get to earn a dime. And so it follows that the more they earn, the more the government will earn also because people are paying taxes. In this way, job loss is minimized and the economy will regain its stability.

    • I think it’s the same thing she is saying in different words “More spending for goods & services will put people back to work. Buy a new house (construction workers get work. So do mortgage brokers and bankers). Buy a washing machine (durable goods manufacturers get work, as do truckers who transport those machines to Sears’ warehouse and from there to your basement). Go out to dinner (restaurant workers get work, as do printers who print up that new menu you’re reading). Pay more taxes (school teachers get re-hired, as do the staff members we eliminated in the department).”

  41. More spending is the way to fight job loss?? Well..that’s a new school of thought it seems. But it seems feasible too. The way you’ve written the article has an unrivalled charm. Great.

  42. Not sure if spending is the answer. Many would say (mostly financial-savvy) folks that all this spending got the US in all the debt trouble we’re dealing with now!

    In fact, we may even be in another “taxation without representation” situation with the last 10 years of tax and spend policy.

    • I agree with Jason. I honestly don’t understand the logic of ‘spending’ to rectify the present economy. But I am obviously wrong… because Bush did it and then Obama also did it

      • Hey,

        I think Prof. X answers your question. She brings the connection between spending and economic development nicely. Read this paragraph.

        “More spending for goods & services will put people back to work. Buy a new house (construction workers get work. So do mortgage brokers and bankers). Buy a washing machine (durable goods manufacturers get work, as do truckers who transport those machines to Sears’ warehouse and from there to your basement). Go out to dinner (restaurant workers get work, as do printers who print up that new menu you’re reading). Pay more taxes (school teachers get re-hired, as do the staff members we eliminated in the department).”

  43. I’m totally with you Professor Martha Olney. Federal government needs to direct money to the state and local governments. Then only this problem can be solved.

  44. I’ve always wondered how that works, the strange balance between spending and saving. Like the economy is some kind of weird, man made machine (which it is) that needs to be kept alive with food, and the food is money. So we need sacrifices: spend like crazy until you “nearly” go bankrupt…and ya never know, the machine might start working again…It strangely works somehow, but not after a lot of suffering from many.

  45. Our teachers should be making more money than the politicians so that we can teach the next generation how to get things back on track. Current leadership on all sides is too corrupt for anything to work at this point. Everyone has an agenda, and all you have to do is print more money to fix it.

  46. The government is broken. It is no longer by the people for the people. It’s over the people, regardless of the people. Sound familiar? The position of president is slowly moving back towards King. And there’s nothing that anybody is doing about it.

    They spend our money, without our consent. They tax us without our consent. They do not listen, we do not MAKE them listen, and what’s worse? Now they even have made it illegal to dissent… Thanks Patriot act. You’re awesome.

  47. Professor,
    I had to recheck the date on the top of your post after reading your article. If the date was anytime between September 2008 through early 2009, I would have been in full agreement with your view on the role of government spending in helping the US come out of the recession.
    At that time, each of the major drivers of the economy were shut off; namely consumers were not spending, businesses were not investing, banks were not lending and the US dollar was strengthening. With “C”, “I”, and “X” depressed to historically low levels, it was incumbent on our government to increase “G” to prop up the economy.
    And “G” has increased significantly; in the best case scenario, cash for clunkers was successful in inducing new car sales, the housing tax credit has helped prop up volumes in the housing market and the support given to banks has thawed credit markets. The problem with this spending is two-fold. First, the additional spending comes at a cost and unfortunately that is a debt burden on the next generation of taxpayers. You state in your post that “[consumers] probably shouldn’t run those credit cards up any further than you already have…”; the government deficit needed to finance additional spending is equivalent to consumers running up their credit card, but at a lower interest rate (because of the Japanese/German/Chinese subsidies) and a longer repayment schedule. This leads into the second problem: with the US under such a significant debt burden to other nations, the US will eventually have to either print a significant amount of money (inducing inflation but reducing the debt load) or have to raise taxes to service the debt; neither of these solutions seem attractive relative to letting our economy find it’s way back with no additional government spending.
    Our economy was at an abyss in the days after September 15th; with government spending, we have slowly made our way back to (relative) health. The economy is cleansing itself and the pain we are all feeling now is good for the long-run; as I learned from you and Professor Romer as an Undergrad at Cal, what is good for the short term is generally bad for the long run, and what is bad for the short term is generally good for the long term (I believe monetary policy may be the exception). Hopefully, the adjustment in consumption patterns and savings rates that are so painful now, will eventually be good for the long run well-being of our country.
    I hope you are doing well.
    Go Bears!
    Gagan

  48. There should be no doubt that the Obama Administration has gone about dealing with the recession ass-backwards. Yes, saving some of the giant financial institutions was necessary, but the way it was done — giving Goldman Sachs and the others carte blanche to do with the half-trillion dollars whatever they pleased — did NOT do the job of freeing up credit for new investment or to shore up consumer spending. The bankers used the funds to transfer their debts and to buy up weaker competitors, making corporations that were too big to fail bigger still. So G,S makes record profits now; from what? From trading paper chits, not making loans, speculating that there are gamblers out there who will guess that the chits they buy from G,S will appreciate in value so that they can sell them,too,maybe securitize them. Sound familiar? Meanwhile, the government allows massive mergers in every industry with the inevitable consequence of eliminating jobs — 2 million of them in the past 18 months or so. And at the same time, state and local governments, suffering from lost revenues, cut services and fire workers, further reducing aggregate demand. However much the feds pour money into the financial industry, and trickle more into a few real stimulus areas that might indeed produce some jobs, the cut backs at the state and local levels completely negate the overall stimulus effect. Look at the stats re the Great Depression. Much criticism is tossed at the New Deal these days by ideological die-hards for “failing to end the Depression.” Yes, it did fail. Because the losses incurred at the state and local levels more than matched the increased fed expenditures. (But at least the New Deal did move to create jobs, and thus consumer demand: CCC, WPA, PWA, FERA.) So it did take the Keynesian effect of military and other massive expenditures required by the outbreak of war in 1939 to finally end the economic disaster. Look abroad, and you will discover that the Germans and other “socialistic” European economies have not suffered nearly the damage Americans are experiencing. Why? Because the Germans have a jobs policy that subsidizes companies that keep their workforces relatively intact. They are using stimulus funds to shore up consumer industries, and when they do help the financial giants they do so with strong strings attached so that the government money goes indeed to undoing the credit freeze, and not merely to restoring outsized salaries and bonuses for the bankers. Putting Summers and Ganthner (succeeding G,S execs Rubin and Paulson) in charge of anti-recession policy was a big mistake, because they can only see the needs of the financial corporations that have made up their world most of their life. Theirs is truly a trickle down theory of economic welfare. (Where oh where are you Chris Romer? And why is no one paying any attention to Volker?)

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