So Much For That

President Obama’s “Son of Stimulus” (aka the American Jobs Act) is already dying the slow, tortuous death of a thousand paper cuts. And for good reason: the majority of Americans don’t buy the President’s latest smoke-and-mirrors plan. After all, stimulus was tried in 2009 and failed miserably. We were assured that spending nearly $800 billion in direct stimulus, plus billions more for “cash-for clunkers,” the automotive industry bailouts and banking industry bailouts would curb unemployment to 8% and have us under 7% by this point. More telling than the fact that was a terrible overshoot, is that nobody in the administration is willing to put any kind of number on how many jobs this latest round of stimulus would create. I doubt anyone in the White House actually believes this would really do much for the economy.

Americans intuitively understand that stimulus spending doesn’t really do much, except exacerbate the underlying cause of our economic malaise. Economists will tell you that the reason we’re in such a mess is because consumer demand – which fuels around 70% of total economic activity – is depressed. If only that were true.

The real cause for depressed sales is much more basic: people can no longer afford to buy consumer goods. They still want iPads®, flat-screen TV’s and new cell phones. But when they sit down with their bills each month, they aren’t willing to incur new debt to purchase them. After all, the debt frenzy that drove the last 20 years of economic growth met its inevitable end with the financial collapse of 2008. We’re still busy digging our way out from that mess and until the typical household reduces their debt burden, don’t expect them to begin spending again.

The same goes for government. The massive expansion of federal debt leaves Americans feeling equally queasy – after all, we just learned a valuable lesson about what happens when people and companies are over-leveraged. When public debt exceeds the total value of the economy and projected spending continues to go up, not down… Well, let’s just say we aren’t interested in finding out if an over-leveraged government can suffer the same fate as an over-leveraged household.