September 14, 2011
The NYT told readers that the Obama administration wants to increase the demand for goods and services, “which could then give employers the confidence to hire.” Actually, an increase in the demand for goods and services forces employers to hire at the risk of losing business.
If a restaurant doesn’t have enough staff to serve its customers, it will lose customers. If a factory doesn’t have enough workers to fill its order then it loses orders. Increased demand forces businesses to use more labor.
Confidence may affect the extent to which firms actually hire more workers, as opposed to increasing the number of hours worked per worker. The latter still remains well below its pre-recession level. This is a strong piece of evidence that a lack of demand, not confidence, is the main factor impeding business expansion.
The article at one point comments that:
“Many businesses and consumers remain sufficiently scarred by the financial crisis and long economic slump that they are awaiting clear evidence of a recovery before beginning to spend and hire at a healthy pace again.”
Actually consumers are already spending at a healthy pace. Their saving rate is close to 5 percent, well below the pre-bubble average of 8 percent. As a result of this low rate of saving (and high rate of consumption), most workers will have very little wealth accumulated at the point their retire. This is especially troublesome given plans in Washington to cut Social Security and Medicare.
The article also discusses the possibility that the Fed will change the composition of its holdings of U.S. government bonds. It could try to bring down longer term interest rates by selling short-term bonds and buying 10-year or 30-year Treasury bonds.
It would have been worth mentioning that the Fed could also reduce the government’s projected interest burden by holding these bonds. Currently the Fed is refunding roughly $80 billion a year (@2.2 percent of spending) to the Treasury from the interest it earns on its assets.
If the Fed continued to hold these bonds, rather than sell them off as it currently plans, it could save the government close to $600 billion in interest payments over the next decade. Given the concerns in Washington over deficits, this would have been worth mentioning.
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