Worse Than Expected on the Economy

Keep your eyes on the gap between what the economy could produce at full employment and the paltry level of aggregate demand (consumers plus businesses plus exports). That’s why the stimulus is too small — and why my bet is the President will be back for more stimulus. The Commerce Department reported today that the economy contracted in the 4th quarter of 2008 more sharply than initially estimated. Consumers cut spending the most in over 28 years. Businesses cut way back as well. Exports were dead in the water.

All told, according to the new data, the nation’s economy shrank at an annual rate of 6.2 percent. Last month, the government’s preliminary estimate of the drop in fourth-quarter GDP was only 3.8 percent. Roughly half the Commerce Department’s revision was due to a sharper drop in business spending than had been anticipated. As a result, business inventories — the amount of stuff they they have on hand to sell — have dropped. That’s good news because eventually businesses will have to replace their inventories, in anticipation of at least some consumer buying, and such replacement spending will spur the economy. But here’s the bad news: Inventories still aren’t dropping as fast as sales are dropping, suggesting even less business spending and investing coming up.

There’s no reason to suppose the 1st quarter of 2009 will be any better, and lots of reason to think it will be worse. Government is spender of last resort. We’re at the last resort now. $787 billion over two years, and only two-thirds of it real spending, is way below what will be needed to get the economy moving back toward full capacity. Do Republicans know this? Is this why they’re continuing to bet that the economy won’t be recovering by November, 2010, and why they’re going to continue to say no?

Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

2 Responses to "Worse Than Expected on the Economy"

  1. Guest   February 27, 2009 at 11:08 am

    They continue to say “No” for many of the same reasons many Americans do: it ain’t gonna work. Ironically, you know this, but somehow think more money will work. It won’t. If people like yourself don’t get real, and come up with the rather obvious, but painful solution, of letting the market repair itself, this Depression (IMO) will be longer, and more painful for the people of this country. However, partisanship, even in economics, has so far led to solutions that are more toxic than the problem. Of course, those who are well off don’t and won’t really care, until the coming unrest inconveniences their lives.

  2. R Horn   March 1, 2009 at 8:04 pm

    Toxic assets of bank’s are home mortgages in one way or another that have gone sour. To have government take over the banks only means that the government then would have to fix the home mortgage problem rather than the banks. The government then would be in charge of foreclosures and deciding who stays and who goes. The tax payer will still have to pay. Why doesn’t anyone ask when suggesting nationalization of banks “what does cleaning up the banks mean”?