This is a very reasonable economic forecast for 2010 from AEI’s John Makin (via Jon Chait’s great new blog.) Chait focuses on the part that says the stimulus boosted GDP by 4%, and wonders whether Republican senators will bother to read that part. Fair enough. I want to focus on the part about consumer demand, and why it’s not sustainable without more government stimulus.
When we reported that GDP growth between July and September was 3.5%
(it’s been revised down to 2.2%), I pointed out that families’
discretionary income actually
fell between July and September even as consumption on durable goods
skyrocketed. The difference was government stimulus, like the housing credit and Cash for Clunkers. Makin makes the same point:
During the three months ending in October, real consumer spending rose
at a 2.6 percent annual rate while real disposable income rose at a 0.6
percent annual rate. Whether spending can continue to grow
substantially in excess of income growth, and therefore draw down
savings, remains one of the major uncertainties overhanging the U.S.
economy as we move into 2010.
This provides a chicken-egg conundrum. Employers won’t grow the
compensation pie unless they see sustainable demand for their goods or
services. They won’t see sustainable demand for their goods and
services unless Americans keep spending money. Americans won’t keep
spending more money than they’re getting from employers. It seems to me
that the only way to complete the circle is to continue to rely heavily
on government stimulus, in the form of tax credits for employers to
hire or employees to spend.
If we’re going to see a robust recovery next year, the most likely
driver is still exports. The American consumer still needs crutches to
stand, but the Asian consumer is on a tear. The ’00s boom was fueled by
American demand, but in the recovery it’s America that will be leaning
on China and India to buy our stuff and bring us back to full
employment.
