Is the economy our problem to solve?

DAVID BRANCACCIO: Let me make our savings-versus-spending inquiry as tangible as aluminum, steel and rubber.
Think of a parking lot with 300,000 brand-spanking-new cars, as far as the eye can see. Sparkling Fords, Cadillacs, Audis still covered with factory-fresh plastic film. Now, vaporize them, and the lot goes empty.

Market researchers at J.D. Powers estimated this week that weakening consumer sentiment means 300,000 fewer light vehicles will be sold in America this year. That's you and me, worried about jobs,house values, debt saying, "nah," better stick with the 2003 Taurus. Meaning auto workers get less to do and have less to spend -- which drags down the economy further. But is that really our problem?

We have a roundtable pulled together here, with Karen Dynan, who focuses on household finance at Brookings and Jeff Harding, who publishes the the Daily Capitalist. Karen, Jeff, hi!

JEFF HARDING: Hi David.

KAREN DYNAN: Hello David.

BRANCACCIO: Karen what do you think? In a sense, it's not a choice for many of us. We couldn't spend even if we had the impulse.

DYNAN: There are certainly a lot of households going through a lot of hardship right now, who don't have the capacity to do more spending. But I do think there are household with capacity -- but are being held back by a high degree of anxiety and despair about the future. There have been significant doubts that have arisen about our policymakers' ability to grapple with key
economic challenges as people saw Washington go through this disarray. Those things have all led to this pessimism, which really can be self-fulfilling. I mean, if people wake up and see a grimmer future, they're going to do less spending than they otherwise would do, which leaves businesses to cut back on hiring and in turn depresses income and in fact, reduces people's capacity to spend.

BRANCACCIO: But Karen, they're also looking at those really sweet low interest rates -- that has to be some kind of enticement. If they can be enticed, is that the right course?

DYNAN: The fact is, with consumer spending accounting for about 70 percent of the economy, we need solid growth in this area to have a self-sustaining recovery.

BRANCACCIO: Now Jeff, I've been reading your stuff, it really sets your teeth on edge, when you hear your calls for consumer spending. But, what are we really talking about here? Government policies to persuade you to spend, and that's what really you're worried about, essentially stimulus.

HARDING: Yeah, the problem with stimulus is they keep trying the same things over again and they haven't worked. And unemployment keeps going up again. It's 9.2 percent. GDP is down to 1.3 percent.Industrial production has been falling for the last 13 months. No wage growth. You can't keep borrowing and spending to make this economy grow.

BRANCACCIO: Karen Dynan, maybe it's just that the stimulus hasn't been enough. If we're trying to have consumers
pop to life, it just hasn't been quite enough of the stimulus that was needed into the face of the economic downturn we've been through.

DYNAN: I think one can easily debate, particularly in hind sight, whether every dollar that we spent, trying to stimulate the economy has been spent in the most effective way. But I think that in the big picture sense, the economy is in a lot better shape than it would have been had the economy not had these programs. But I do think there is more that the government can do now.

BRANCACCIO: But isn't this the precise time that if you're making a spending decision for yourself, or a savings decision for yourself, that in fact, you should be cautious and save. The rational course now is not to spend.

DYNAN: In terms of the macro-economy, of course we want to be encouraging more spending in order to jump start the economy into a more durable recovery. You know, as for whether any given household should be spending more or saving more right now, that's really going to have to do with the specific financial situation that the household is in.

BRANCACCIO: And there's a sense, Jeff, we're all, when we sit around with our significant others, going through bank statements and deciding how to allocate our money, we're all micro. None of us is macro at that moment. So, it may be that we're just going to reign in our horns and not spend so much when we're looking at headlines like we've been seeing from Wall Street.

HARDING: Well, I agree with you, I think it's the rational thing for consumers to do. I mean, we've had so much stimulus that has failed us, and you look around and who has benefited from this stimulus? It's basically been Wall Street. It hasn't been Main Street. We've seen what's happening with Treasuries. Basically, yields went down again, today. Treasuries went up, and all that does is harm savers. So, we have, basically, some economic growth, but what we have really is a bifurcated economy.

BRANCACCIO: The bifurcated economy, I've been waiting for you to say something like this, because I clipped this thing from Advertising Age not long ago. It was about growing income inequality in this country, the middle class disappearing and what that means for companies. It was quite eye-opening. The research report from Ad Age made the case that some firms might just have to sell to the wealthy few. "It appears that mass affluence may be a thing of the past," and again I'm quoting, "marketers should reconsider how their products appeal to elite consumers." In other words, just worry about the top end of the income scale, because the rest of them just aren't going to be able to spend.

HARDING: I just saw the number the other day that 64 percent of Americans can't come up with $1,000 in case of an emergency. Yet, you see Wall Street making millions and billions of dollars at a time. What's happening is is that capital's being
redirected there instead of where it ought to go -- and that's to Main Street. And it's just not happening.

BRANCACCIO: Karen, how are we going to get out of this mess? What has to happen?

DYNAN: Well, we need to see more demand in the economy. We also need to take steps to disburse spending today. Some of that is going to be by undertaking policies that will support incomes, create jobs. Some of that is simply by fixing the perception that Washington is dysfunctional, and policymakers simply can't address key economic challenges. You know, if we can address that problem, that's a way to make both households and businesses more confident to spend. You know, for businesses, less reluctant to hire.

BRANCACCIO: That's all we have to do. We have to fix our democracy. I'll get cracking on that, though, Karen. That'll be my burden for the rest of the weekend. All right, Karen Dynan at Brookings Institution, Jeff Harding at the Daily Capitalist, have a great rest of your weekend.

DYNAN: Thanks, David.

HARDING: Thanks.

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