No candidate will become president soon enough to matter, and to ask the question is to presume that recessions can and should be avoided. But some business mistakes require time to be fixed. Too many houses were built in some areas, so prices have to fall to discourage more building and encourage more buying. Some banks made too many bad loans, so they need to become more cautious. Besides, if presidents really knew how to avoid recessions, why do we keep having them?
Nonetheless, President George W. Bush is now joining the election‐year rush to “give the economy a shot in the arm.” A shot of debt, that is.
All proposals for fiscal stimulus claim to “jump‐start” the economy by having the government borrow money from Smith and give it to Jones. Unfortunately, Smith is paid interest on that IOU, which implies a higher tax burden on somebody. That future taxpayer is, as usual, the forgotten man. All the attention is instead focused on Jones — trying to get the Jones family to spend more on what Mr. Bush alluded to as “basic necessities.”
Investors know such consumer staples are the least cyclical component of the economy. The most recession‐prone household purchases are those that can most easily be postponed, such as new homes, cars, appliances and furniture. Increasing the generosity of unemployment benefits, home heating subsidies, and food stamps is no help to such cyclical industries.
An indiscriminate spurt in “aggregate demand” is essentially irrelevant to longer‐term economic problems concentrated in particular industries and particular areas. Food stamps don’t buy condos in Las Vegas or new cars from Detroit. Subsidies to lower‐income households are also very difficult for Congress to take back and therefore unlikely to prove temporary.
Extending unemployment benefits “increases the average duration of unemployment by about two weeks,” according to the Congressional Budget Office. That is certainly no stimulus. The resulting higher unemployment rate then provides an ironic rationale for more spending, which hurts rather than helps. Transfer payments discourage work. Federal purchases absorb real resources such as skilled labor, real estate and equipment that would otherwise be available at a lower cost to private business.
Why all the political emphasis on promoting a one‐year sales push for consumer staples? Recessions never began with a drop in consumer spending, except when credit controls were imposed (1980) and when price controls collapsed (1953, 1973).
The economy was in recession from March 2001 to November 2001, but consumer spending fell in only the first and last of those months, plus September. Real consumption last November was still 3% higher than a year before — not much below the post‐1960 average increase of 3.6%.
We are nonetheless constantly told that consumer spending is the driving force behind economic growth or recession, simply because 70% of GDP is used to finance consumption. This demand‐side fallacy arises from focusing on uses of income rather than sources. In reality, consumption depends on income and wealth, and income and wealth depends on business. If business is profitable, personal income from work and investments will rise and that will finance consumption.