Government Stimulus Needed Because Private Sector Won't Act

Consumers, home buyers and sellers, and employers are engaged in a high-stakes game of economic chicken.

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With record deficits and debt, why should the federal government spend more money--either in the form of infrastructure outlays or tax cuts? Because consumers and the private sector won't.

President Obama faces a tough enough challenge, trying to repair an economy devastated by debt, high unemployment, a burst housing bubble, and sluggish growth. But with the recession lingering, consumers, home buyers and sellers, and employers are engaged in a high-stakes game of economic chicken that is making any recovery slower.

Business leaders blame the hiring drag on an uncertain regulatory environment and high taxes. There may be some truth to that; it's hard to plan for business expansion if you don't know what the new regulatory environment will cost. But the lengthy recession has enabled employers to get more for less, as workers have been forced to accept cuts in pay and benefits along with expanded job responsibilities. Why should employers hire more people if they know they can get by with fewer workers? The only way to create an environment which forces more hiring is to increase demands for goods. But consumers—working for less, or not at all—are limiting their spending, easing pressure on inventories.

Homeowners and would-be buyers are engaged, meanwhile, in their own standoff, with owners stubbornly refusing to accept the fact that their homes are not worth what they'd like. Many bought houses on the risky presumption that their home values would appreciate exponentially, and are reluctant to sell them at lower prices. And while home prices have started to creep back up, sales of existing homes and condos dropped more than 27 percent in July from a year previous. Since home equity loans were a strong supplier of consumer spending during the boom, retail sales take a hit along with the housing market.

Obama's proposal for $50 billion in infrastructure spending may not provide a dramatic enough stimulus to affect the unemployment rate, and the $200 billion in targeted tax cuts to promote business investment may not calm fears enough to spur a big round of hiring. But without a government nudge, the private sector may not do it at all.

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