The Real Recession Problem: Consumers Are at the End of Their Ropes

[flashl]

Perhaps the silliest part of an already silly stimulus bill is a provision giving corporations big tax deductions this year on the costs of new machinery, instead of spreading those deductions over several years, as is normally the case. The idea is to get businesses to invest in more machinery, which will stimulate the economy.

But accelerated depreciation, as it’s called, doesn’t work. Almost the same tax break was enacted in 2002 and studies show just about no increase in business investment as a result. Why? Because companies won’t invest in more machines when demand is dropping for the stuff the machines make. And right now, demand is dropping for just about everything.

This tax break exemplifies the illogic of what’s called supply-side economics. If you reduce the cost of investing, so the thinking goes, you’ll get more investment. What’s left out is the demand side of the equation. Without consumers who want to buy a product, there’s no point in making it, regardless of how many tax breaks go into it.

Which gets us to the real problem. Most consumers are at the end of their ropes and can’t buy more. Real incomes are no higher than they were in 2000, while food and energy and health care costs are all rising faster than inflation. And home values are dropping, which means an end to home equity loans and refinancing.

Most of what’s being earned in America is going to the richest 5 percent, but the rich devote a smaller percent of their earnings to buying things than the rest of us because, after all, they’re rich -- which means they already have most of what they want. Instead of buying, the rich invest most of their earnings wherever around the world they can get the highest return.

Robert Reich

[Fresh_Start]

1. the debt crisis is the underlying problem

it was masked while housing prices were rising
but it is exposed in all its ugliness now that housing appreciation is vaporized

[truedelphi]

3. Also as another DU'er said

The wage vaporization is part of the problem

The big wage means of providing income for yourself and your family is gone.
Unless you follow the industry over seas.

Automotive industries: Mexico and other countries.

Steel industries: China

Textile industries: Honduras and Latin America

Research laboratories: Singapore

Computer Programming: Pakistan, India

Company call centers: Ditto


Meat packing industry: Some packing still occurs in MidWestern states but handled by immigrants brought in by Hormel and others. Oscar Meyer is now in Mexico.


Hillary Clinton promises more HB-1 Visas for the Silicon Vallery executives.

[Fresh_Start]

6. Obama also promises more HB 1 Visas

in case you didn't know

[truedelphi]

8. good to know and yet another reason that I

Rue the fact that Kucinich is not viable under the current auction day requirements, er election day requirements, of Corporate money, Corporate money, and more Corporate money.

[Warpy]

4. Maldistribution of wealth is the underlying problem

Wealth has been concentrated into few hands while relaxed credit has everybody else drowning in debt to make up for substandard wages that have been depressed since 1969, the year liberals went out of power.

People aren't going to see it clearly until credit cards stop raising those limits and demanding higher minimum monthly payments. With no means to leverage more debt, people are going to start realizing just how poor they've gotten under 38 years of conservatism, 27 years of Reaganomics.

This one isn't going to be as easy to fix as the last one because the government can't borrow and spend like FDR did.

[raccoon]

10. Because they've already done that, except they spend the money on imperial wars instead

of programs to help the 95% who aren't ultra-rich, as FDR did.

[DaveJ]

2. About the new machinery deduction...

Obviously my inferior intellect is incapable of understand wtf he's talking about.

Businesses should actually want to purchase new machinery during a recession. It is during slow times that A) they should want to design new products which will draw customers back, which will require major retooling, and B) they need to compete more strongly by investing in new technology.

[RPM]

5. They should, but they have to have some place to sell the product

the most efficiently made products wont sell if the buyers dont want / cant afford them.

[DaveJ]

7. That's where my lack of a PhD comes in....

Sorry for the bitterness. To me it seems perfectly reasonable to try to stimulate the economy be encouraging businesses to innovate. Apparently Reich has a broader perspective on things. He seems more focused on empowering the lower levels of society with the assumption that they will produce what we need in the future. Intuitively it's just over my head since I'm not an finance expert.

[flashl]

9. Please expand... where do you see the need for machinery in a ‘service industry’ society? nt