A coment on my recent blog about the economy leads me to this one.  The commentator was totally correct in saying that when private consumption does not stimulate demand, and thus growth, it falls to the government to take the lead.   I applauded President Obama in his efforts to jump start the economy with new spending in one year equivalent to what we spent on 8 years of war in Iraq.  It was the right thing to do. 

While supporting the president’s move I also stated that I would have preferred a different approach.  I called for returning to the “mountain of private debt” that fueled economic growth until 2007.  Both ideas have the same objective, pump up demand.  But both the president and I failed to fully understand the reality of the American mindset at this time, people want to pay off debt, rather than incur more.  In an atmosphere where all fear for their job and future prospects no one wants to incur more debt, rather all want to hold on to what they have and use it prudently. 

This is easily seen in what happened to the president’s transfers of money to individuals via his stimulus program.  The largest part of the plan was to give tax breaks to the individual, e.g. reduced contributions to Social Security, for him to spend.  The next largest was transfers of funds to states and local governments to keep public employees employed with the intention of maintaining their spending.  Then came extended unemployment  benefits to insure the unemployed would be able to continue their spending.  But this did not happen, at least on the scale the president and his team expected.  Consumption continued to decline indicating that people were saving, not spending, this extra income. 

My idea was similarly shot down by reality.   Even with interest rates as low as 2-3% consumers do not want to borrow, in fact they want to pay down their debt.  Now many, certainly not me, consider this to be a positive result, but  it means we are destined to suffer a moribund, lackluster economy for some time to come until we pay off to a level of debt that we believe to be prudent. 

The result of this miscalculation by the Obama team and myself is that the economy is still limping along at less than 2% growth and abnormally high unemployment.  We are in a hole with no apparent way out.  Now when you are in a hole the first thing you do is stop digging.  So we must shed our government “pump priming” and cheap credit for consumers and look for new ideas.   The Republican party offers inducing private investment in new or expanded enterprise via tax incentives and lower regulation and I personally am convinced that zero capital gains taxes would do this.  However, this proposal has a barrier, why invest when there is slack demand?  The only out here is to invest in converting our industry, not expanding it.   The only way to invest is to change the way we produce our goods and services, not make more.   An obvious channel here is to make our economy more “green.”  But I am not convinced that the public is totally on board this noble venture.  

We need some new ideas.  The Democrats offer essentially more of the same they have used these last four years.  The Republican offer an “iffy” proposal.  Me, I say dispense with capital gains taxes, which has about as much a chance of becoming a reality as my jumping off the Empire State Building and landing unhurt.   Ideas welcomed, please.