World leaders push for second stimulus
Posted
Jul 06 2009, 10:23 AM
by
Catherine Holahan
Rating:
Is $12.8 trillion not enough? In an effort to pull the country from the brink of depression, the U.S. government has already spent, lent or pledged that amount on stimulus packages, bank and insurer bailouts, auto rescues and U.S. Treasury purchases.
But some are still calling on Congress and other rich nations to do more. On July 8, world leaders meeting in Italy for the G-8 summit expressed support for additional stimulus spending, should the need arise.
The call follows comments made early this week by Vice President Joe Biden indicating that the U.S. could seek a second stimulus package in the future. In an interview with ABC on Sunday, Biden said that the government misjudged the depth of the recession. He also said that, though President Barack Obama's administration is not seeking a second stimulus package now, it could do so in the future.
The reason for the seemingly incredible call for more public funds is the unprecedented pullback in consumer spending. The U.S. economy runs on personal consumption. In recent years, consumer spending has accounted for about 70% of U.S. gross domestic product. In the past two years, however, the consumer spending engine has stalled due to high unemployment, stagnant wages, tight credit and more than 14 trillion in paper losses due to steep declines in property values and market investments.
"The consumer is tapped out," said Diane Shand, a director at Standard & Poors covering retail companies. "They can't access the equity in their homes anymore, and a lot of it really has to do with the unemployment picture."
The unemployment rate is at a 26-year high of 9.5% and is expected to reach 10% before year end. More than 14.7 million people are unemployed. The number of folks struggling to find work jumps to 25.5 million after adding all the Americans that have either given up looking for work or are stuck in part-time or temporary jobs due to the unavailability of full-time employment.
Without a recovery in consumer spending, the economy will continue its downward spiral. The GDP declined about 5.5% in the first quarter of this year, due in large part to consumer cutbacks.
The government is hoping that private money will follow its public investments. In theory, funds for stimulus projects should flow to businesses spurring them to increase spending and create more jobs, ultimately leading to a recovery in consumer spending. But, so far, the economy hasn't seen much in the way of a consumer spending boost (though private money has flowed to the rescued banks).
That's partially because the government hasn't spent much of what it has promised. Only 10% to 15% of the $787 billion stimulus has been put to work. However, even that little amount appears to have spurred some positive sentiment. Consumer spending did rise about 0.3% in May on top of a 0.7% rise in April. That's certainly not a lot. But it wasn't a decline.
The fear is that all that money flowing from the government will ultimately prove insufficient to reverse the economy's negative trajectory. If the government doesn't have a plan in place to commit more funds to truly reverse the economy's course, some argue that any good from the current stimulus will be negated by continued high unemployment and depressed consumer spending.
One problem with pledging more funds is inflation. The more money the government promises to fight the recession, the more it will stoke concerns about inflation or stagflation: a period in which the dollar's value declines despite a lack of real economic growth. The risk of either inflation or stagflation could cause investors to demand higher returns to buy U.S. debt. The U.S. doesn't want to promise to pay even more in the future when the economy's growth is uncertain. The national debt is already at $11.5 trillion -- about $36,532 per person.
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