OK, we Americans do not save enough-we spend. J.M. Keynes noted that excessive thriftyness (the paradox of Thrift) could cause problems for an economy, as demand would drop. So, is the solution for this recession a massive spending program? how about this: we set up a grant program so that people could buy new American cars-you get $1000 if you buy a $10,000 car, $2,000 for a $20,000 car, etc. Magically, the dealerships would be flooded, the factories would pick up as the orders came in, and everybody would be happy.
So, are Americans not spending enough?
The problem with that is it assumes stupidity on the part of people. Individuals tend not to make large purchase decisions based on their money situation today, they include their view of their economic prospects over at least the medium term.
People have stopped making such purchases because they are scared they will not have a job in a year’s time. If you want spending to pick up, you need to restore people’s confidence.
This might make sense if the average American was sitting on a pile of savings in their mattress, and not spending it. It’s my understanding though, that the average American has more debt than ever before, and does not actually have the money to spend.
In your example - they get $1000 to buy a $10,000 car… Where does the other $9,000 come from? They’re tapped out.
And did the federal Gov’t not already try this earlier this year with the tax “refund” idea?
I was just going over this idea at lunch, the maxim being “you can’t save your way out of a recession”.
Instead of bailing out the big three, maybe some broad public works projects to replace some of the nations decaying and inadequate infrastructure. Then it’s a capital project, that is, value is retained for many years after the initial investment. Also pump money into research and development of new technologies, especially with regards to energy, water and food.
This is an idea that has merit. I really hope that the Canadian Gov’t takes this idea seriously, even if we run a budget deficit for the year. We can afford to do so, since we’ve run a surplus for the past 12 years. NOW is the time for governments to spend, but I don’t think its necessarily a great idea to bail out one particular industry*, or to give money to consumers directly.
*speaking of this, why the hell are we even THINKING about giving a bailout to Ford, GM etc. in Canada? Do we tell Toyota “gee, sorry you were so efficient in your car manufacturing plant in Cambridge, Ontario, and made cars that people actually wanted. As a reward, you get nothing, and we will give a boost your competitors that make crap cars.” Ya, that makes sense.
I wonder if the fact that the American standard of living has gotten so high actually hurts us in times like these. People are discovering that it really doesn’t hurt all that much to cut back spending. In the '30s, if you were thrifty it meant you were wearing rags and scrounging your food from a dumpster. Nowadays “thrifty” for most people means you can’t buy brand name shoes and you can only eat at a restaurant once a week.
Not that I’m complaining.
Does Canada have the same infrastructure problems the US has? If it doesn’t why not give money to consumers directly?
From last year’s Toronto Star:
Which is all too often accurate.
But the stupidity here goes the other way, making things worse. Once people start panicking, they will assume things will be worse than they actually are or will get. When things are going well, people assume it will always be sunny.
The stupidity that would be required here would require optimism, not the economic pessimism that seems omnipresent.
When has this ever been a bad idea? :D
That’s the paradox. The best way to do it is to do something (like infrastructure) which will cause the unemployment rate to fall.
I’m not sure that the problem is stupidity but rather it is that people don’t act in the way classical economics assumes they will. Who would get a mortgage they can’t afford? Issuing regulations to prevent this insults the public. Then, when people desperate for home ownership and unable to see through the crap being handed to them on how they can never lose, we hear that they’re stupid after all. No, just human.
Manias happen all the time, from tulips to doc coms. People should have borrowed less five years ago and let the economy down slowly - people should spend more now. But without a regulator, smooth transitions are never going to happen.
The government has a huge debt and a huge deficit which are a big part of the problem. So the idea is that the Government should just happily increase both deficit and debt? Just spend even more?
Wow, I didn’t realise it was this bad. I’ve witnessed the infrastructural problems in the US but wasn’t aware of similar problems north of the border.
I am usually a deficit hawk but this time we need to spend money to get out of the recession. Plus, since at the same time non-governmental corporations are doing horribly, government bonds are considered the safest, so we can borrow extremely cheaply, so we might as well sell long-term bonds while we can.
The time to reduce the deficit and pay down the debt is during the boom times. Had we done that it would have slowed an overheated economy and not let the bubble form. Once the bubble bursts, it takes deficit spending on the part of the government to spur growth. Spending on infrastructure and energy projects are the best bet here. The stimulus will have to be sustained for two or three years to have any real effect, so long term projects are a viable solution.
The governent needs to spend when the people are saving, and save when the people are spending. This collapse in the economy comes because both the government and the people spent the better part of the last decade spending like drunken sailors on payday.
It seems that what’s good for the individual–living within your means, saving rather than spending, considering luxury purchases carefully–is bad for the economy overall. Sorry, economy, but this consumer is sticking with her thrifty ways.