Only two presidents, Herbert Hoover and George W Bush, presided over an economy that had actually lost jobs by the end of their terms in office. Barack Obama may join that group as the third. All three of these presidents followed similar economic policies, which failed for similar reasons.
It has taken me longer than usual to “get around” to writing this blog post, and I think I know why. There probably isn’t much that you can do about the issues I’m going to discuss, which makes this a rather shallow exercise for me. But I said I would write about it, so here we go.
The government can’t create jobs
The purpose of stimulus plans is to increase “aggregate demand”, or, in simpler terms, to increase consumer spending. Supposedly that increased spending will convince companies to hire. But consumer spending has already recovered to pre-recession levels, and that has not fixed the employment problem:
Companies still don’t want to hire, and the reasons may be very simple. Everyone is in crushing debt, which makes future prospects terribly uncertain. Personal debt, as a direct result of the massive housing bubble, is higher than it has been at any point since the Great Depression. Total personal debt exploded from 4.6 trillion dollars in 1999 to 12.5 trillion dollars in 2007. It still stands at a whopping 11.5 trillion dollars.
In 1984, on average, household debt was 64% of personal disposable income. By 2007, it had reached an unsustainable 133% of personal income. It is still at 117% of income. Companies will be afraid to hire until individual Americans pay down more of their debts.
In theory, a government stimulus could still work under conditions of serious personal debt, but guess what? Even in theory, such stimulus plans can only work if the government itself is not in debt. Well, our government is in pretty bad fiscal shape. As a result, any attempts to “create jobs” by the federal government will only make things worse.
If the government raises taxes to increase spending, then it is literally taking money from productive companies and giving it to unproductive companies. That will destroy jobs. If the government borrows in order to spend more, when the whole employment problem is a result of enormous debt in the first place, then that will only discourage companies even further from hiring.
This is why stimulus spending does not work. And now it’s time for me to move on to more interesting topics.