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October 7, 2010

It's The Lack Of Demand, Stupid!

-- by Dave Johnson

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture as part of the Making It In America project. I am a Fellow with CAF.

In the 1992 campaign the Clinton War Room had a famous sign that read, "It's the economy, stupid!" This meant that the central theme of the campaign was the economy. President Obama's downturn-fighting war room needs a sign, too. The sign should read, "It's the demand, stupid." And what that means is: businesses want customers, not tax cuts.

The stimulus was supposed to help make up for the lack of demand in the economy caused by Bush's financial crisis. The stimulus worked, but was not enough. And tomorrow's job numbers are likely to reflect that.

Here are some (slightly out of date, new numbers come out tomorrow) job charts that show the effect of the stimulus as it kicked in, and now as it fades. First, the overall jobs picture:

July Jobs Report

The manufacturing jobs picture:

July Jobs Report - Manufacturing Jobs

The lesson from these charts is obvious, and right in front of your face: The stimulus worked, but was not enough.

People need jobs, not tax cuts. Jobs create demand and demand creates jobs. Tax cuts just create the massive deficits and concentration of wealth at the top that kills demand and jobs as we are seeing now. When neither jobs nor demand is happening the government needs to step in and create jobs to get things moving, as well as just to keep people employed so they can get by. At a time when our economic competitiveness is hampered by an aging infrastructure that has to be fixed up sooner or later anyway, combined with the ability of the government to borrow money at record-low interests rates, it seems obvious that government should be directly employing people to modernize our infrastructure.

Here is a chart of the "output gap." That big dipper at the top right is the current Bush-caused gap.

outputgap

Government needs to step in and fill that gap by creating demand. We need fiscal stimulus. The stimulus worked, but was not enough.

Businesses Want Customers Not Tax Cuts

Businesses want customers. Hand a businessperson a check and that businessperson will smile and say, "Thank you!" But the businessperson will not hire a single person more than is needed to meet demand. That check is going in the bank. If it is a tax cut, it is going in the bank. If it is a direct payment it is going in the bank. "Thank you," bank. There is no other path that money will take except, "Thank you," bank.

But a businessperson with customers coming through the door will do whatever it takes to make sure there are enough employees to serve those customers. Businesspeople understand opportunity. A businessperson with an overdrawn bank account will hire employees to meet demand, and will find a way to get the money to pay for it. He or she might sell a car, run up the credit cards or even pawn jewelry or sell the first-born, but the employee will be hired because customers are coming in the door. (I know this, I've been there.)

Economist Joseph Stiglitz spoke up on Tuesday about the Federal Reserve's loose monetary policies, which are intended to help banks, and get businesses to borrow and expand,

"The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy," Stiglitz said. "It's doing nothing for the American economy, but it's causing chaos over the rest of the world. It's a very strange policy that they are pursuing." [. . .] But additional monetary stimulus will "clearly" not solve the problems caused by lack of global aggregate demand, Stiglitz said.

"Lowering the interest rates may help a little bit, but that's much too weak to address the problems facing the United States and Europe," Stiglitz said. "We need fiscal stimulus."

What he is saying there is that making it easy to borrow is not creating jobs or demand. We need "fiscal stimulus" which is government directly stimulating demand, which is what makes businesses hire.

So, once again, the answer is so clear and obvious that it is exactly the kind of thing that the elites in DC will miss: The stimulus worked, but was not enough.

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Posted by Dave Johnson at October 7, 2010 10:18 AM


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