In Need of Demand
Whether it is a new toy, car, job, or house, people do not often have trouble demanding what they want, except for when it comes to present-day economics. After two years of economic turmoil, the Great Recession has been declared “over.” However, despite the gradual improvement and grandiose declarations, most would be reluctant to say that the worst economic depression since the 1930’s is over. So what is missing in the recovery process? Demand.
While it would be idealistic to simplify the golden economic solution into one word, it is essential to recognize the positive influence that increased demand would have on the economy today.
According to The New York Times, American companies are currently “hoarding one trillion dollars in cash but are unlikely to spend on expanding their businesses and hiring new employees because of continuing uncertainty about the strength of the economy.” In addition, individuals are saving their money, spending frugally with anticipation of what the future may bring.
These cautionary actions may seem like the appropriate measures to take in an economic crisis. But they are in fact the opposite. Human intuitions and economic principles are butting heads as misconceptions continue to proliferate and propagate the recession .
In an effort to rectify this, the Federal Reserve announced on Wednesday, November 3rd a 600 billion dollar stimulus, part two of the initial 787 billion dollar stimulus given at the start of the recession two years ago.
Both stimuli prompted the same contentious debate amongst Democrats and Republicans, small versus big government. However, we must not view this stimulus as a bipartisan gesture, but rather a reaction to our inaction. In an increasingly bipartisan world plagued by political gridlock, it is time to take collective action as citizens of the United States for the benefit of the entire nation.
First, expectations must be altered. By expecting a gradual recovery, by expecting a failed stimulus, and by expecting a prolonged recession, we foster an environment in which these will certainly occur. Instead, if companies begin once again to confidently invest in themselves as well as others, if individuals begin spending their money like they would after a Christmas bonus, we could truly dictate the economy’s direction.
In a time of 9.6% national unemployment (which is actually estimated to be close to 20%) spending money seems impractical when one is barley making ends meet. This is where the division of responsibility must be explained.
Those who are suffering less from the economy’s downturn have an obligation to contribute more than those who have been particularly hard hit. Increasing consumption and investment are two core elements of stimulating overall demand. Initially, those of higher economic status—who, although mired in a nation-wide recession for the last two years, are still the most likely to have some amount of surplus money—must assume their leadership in both spending and investment. Then, as the money flow into the economy is revived and energized, the masses will likely follow. This action is not unfair or burdensome to the upper class, as they benefit from an economically efficient society as much as the lower classes do.
Secondly, the Obama administration needs to restore economic confidence in the battered and bruised American public with some pointers from the past. Throughout the Great Depression, President Roosevelt held fireside chats, radio segments that addressed the economic status of the nation. His first show was meant to encourage individuals to redeposit their money in the banks. At the conclusion of his speech FDR stated, “After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people… Let us unite in banishing fear. We have provided the machinery to restore our financial system; it is up to you to support and make it work.” While the economic missteps that led to the Great Depression may not be equivalent to those of today’s Great Recession, FDR’s principle holds constant and remains true today.
Obama, Congress and the entirety of the political realm must reemphasize the need for confidence and unification as a nation in the same way that FDR did 80 years ago. Rather than getting bogged down in partisan politics, American citizens and politicians alike must act as rational and influential individuals who, through increased consumption and revised expectations, can once again put the economy on the right track. Both common sense and I demand it.