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By Steve Levy

Why Aren't Consumers and Businesses Spending More?

Uploaded: Jul 15, 2010

There are two "political" answers in this important policy debate.

One is a version of "Obama is terrible for business" and cites uncertainty and fear of higher taxes and regulation. In response the administration sometimes offers the "George did it" explanation that all bad economic events are tied to Bush administration policies.

I offer a more common sense, no blame explanation.

Consumers account for the majority of spending in the economy and they have every right to be cautious. Consumers face high unemployment and losses in home and retirement wealth. They accumulated large debts over the past decade and need to stop spending more than they earn in order to reduce debt balances.

Until the economy, housing and stock markets recover more, there is no prudent reason for consumers to go on a spending binge.

What about businesses -- large and small?

Actually business investment in two areas is increasing. Spending on efficiency in the form of new equipment and software has been growing for three quarters. And venture capital funding has begun to grow during the past year.

What is not increasing is investment in structures, i.e. new factories and facilities. This is despite increasing profits and large cash reserves for corporations as well as low interest rates.

But this disinterest overall in expanding facilities makes perfect sense for most companies, certainly most non-technology companies, as they have large excess capacity and have been laying off workers in response to low levels of sales and customers. You don't need any presidential guilt theories to explain the reluctance so far of companies to expand capacity.

Although the debate about the contribution of Keynes has morphed into a debate about the wisdom of more federal spending stimulus, the original contribution was the argument that recessions are not really self correcting and that government policy intervention to boost spending is appropriate.

The U.S. economy has been hit with several negative events simultaneously and the argument that the economic recovery needs a continuing government stimulus "bridge" seem compelling to me.

While I have argued that extending unemployment insurance, continuing aid to state and local governments and additional infrastructure spending are good ideas, there may be temporary tax policies such as suspending payroll taxes or targeted investment incentives that are also good ideas.

For all of these ideas we will have to pay the money back when times are good but fear of future deficits is not a sufficient reason to sit by and let the recovery drag on for years.