Recent polls indicate that far more consumers are concerned about the level of our debt and deficits than they are about unemployment (perhaps because 9 of 10 people who want a job have one, but all 10 are concerned about the now clearer implications of excessive spending and debt accumulation).
So, it would seem to follow that if consumers are most afraid of debt expansion, then more large government programs to “stimulate” the economy might heighten their fears and produce even more contractionary behavior (more saving, postponed buying) which could offset, even overwhelm, any expansionary power the new program might contain.
Measures of consumer and business confidence in August strongly suggest that confidence in the future of the economy deteriorated.
Small business owners were clearly not convinced by the debt ceiling agreement, as sentiment, after eroding by small amounts for 5 months, took a plunge in the August survey, a vote of “no confidence” on policy. Only 7% thought business conditions would be better in 6 months while 41% expected them to be worse, 23 percentage points worse than July. Twenty-one percent expected real sales volumes to rise over the next 3 months, but 34% expected declines, a net deterioration of 12 points from July.
The prospect of no real progress on the spending/deficit path clearly discouraged business owners.
The August University of Michigan/Reuters poll of US households provides more support for this proposition. Three-fourths expect “bad times” for the economy in the coming months, just below the survey record of 82% reached in 1980. Asked for examples of recent news that explained their pessimistic view of the economy, 25% provided spontaneous negative responses about government, a record in the 50 year history of the survey (the last record occurred in 2010 when the health care act was passed).
When asked to rate the Administration’s economic policies, 57% gave a negative rating, a record high, exceeding the worst ratings given to any past President. Only 5% had a positive view of Administration policies. Survey director Richard Curtin put it well: “Consumers have shifted from being optimistic about the potential impact of monetary and fiscal policies to a sense of despair and pessimism about the role of the government.”
If more debt and government spending have become the major concerns of a majority of consumers, then the more the government tries to do with big spending and borrowing programs (“we’ll tell you how we’ll pay for it later”), the more fearful of the future many consumers and business owners will become, inducing them to spend even less and save more. This does not promote the recovery we need in the consumer sector to re-start hiring and small business investment.
If this is the case, it might be more stimulative to announce a bold plan of retrenchment in government spending, identifying very specific spending cuts (particularly in special interest spending which is not broadly popular) that would occur immediately to clearly and convincingly reduced the deficit and later even reduce the level of debt.
With confidence in the future restored, consumers and business owners may well be much more willing to bet their earnings on the future by hiring and spending.
This is the kind of broad-based “stimulus” that is needed, growth in the private sector (with the employed spending more money), not in government’s share of GDP. Absent confidence, tax cuts will be saved, not spent and current consumption might be reduced as well.
It’s a “confidence game” worth thinking about.
William Dunkelberg is an Economic Strategist, Boenning & Scattergood and Chief Economist, National Federation of Independent Business.