|Consumer spending needs to increase|
|Friday, 01 July 2011 11:12|
The United States economy is caught in revolving crisis as its leaders frustrate themselves trying to resolve the long economic malaise. It is not unfair to say that despite seve
ral methods tried by the government and some of the nation’s leading economists, there has been no significant improvement in the economy.
The problem is that the economy is starved of public spending. This started when banks tightened credit to businesses and consumers. Businesses had no cushion to pay salaries and replenish inventories while waiting for payments from customers, escalating layoffs and increasing unemployment. As unemployment grew, people had less money to spend in the general market. With retailers receiving lower sales they too laid off staff and reduced inventories. The resulting decline in demand worsened the economy. Meanwhile, banks further limited consumer credit by imposing restrictions on credit card usage – another blow to consumer spending.
As the problem of consumer spending escalated, international financial organizations like the IMF sent out conflicting messages. Some suggested that countries like the U.S. were increasing the national deficit by too much, while others said without large public spending, several economies, including the U.S. risked triggering off another Great Depression.
When President Obama took office, his advisors solution to the then recession was to stimulate the economy with cash – hence the large stimulus package early in 2009. The ensuing debate included the size of the stimulus package and how the money should be divided – some said funds should go to consumers as well as general public work projects.
The political controversy over the federal stimulus plan still exists, but some economists are now calling for another plan with no solution to the grave unemployment problem, and small businesses still struggling for credit and customers. But it doesn’t help that Obama’s opponents counter government attempts to generate public spending, arguing against growth in the national deficit.
Without signs of private sector plans to significantly increase spending, or banks to loosen credit, isn’t it then left to government to increase public spending? As argued in this paper’s editorial last week, most of the nation’s politicians, especially those in Washington D.C. seem to lack the political will to take radical measures to mobilize the economy.
The economists pressing for another stimulus plan argue that more funds should be directly allotted to consumers so they can spend on consumer goods. Others, despite the Republican’s resistance, argue that for the government to reduce its large deficit, a new tax policy must also be introduced, one that will enable the government to increase tax revenue through a special federal general sales tax (GST).
By giving consumers more purchasing power, through a new stimulus plan, introducing a GST on goods and services, except essential foods for children, seniors and the poor, some medicines, and other essential items, would significantly boost federal and state revenues.
Some economists do not support increasing income taxes, but strongly believe more radical measures like a new stimulus plan, less income tax, but higher consumption tax will generate the spending and the revenue to grow the economy.
For years, the American economy has been in a state of “stagflation” – a stagnant phase with high unemployment coupled with weak consumer spending. The nation’s leaders must comprehend that economic growth is dependent on more consumer spending. Unless consumers have the wherewithal to spend, chances are the nation’s economy will further stagnate.
|Last Updated on Friday, 01 July 2011 11:27|