There’s no magic bullet, says Steven Fazzari, economics professor at Washington University in St. Louis. The root cause of the current economic slowdown in the U.S. goes back several decades. There has been a concurrent wave of increasing consumer spending and rising consumer indebtedness. In the past, consumer spending actually helped the economy as it raised firms’ sales and encouraged more hiring. But the associated rise in household debt, most obviously in the recent housing bubble, has come back to haunt the U.S.
“Unfortunately, the cost of letting institutions fail is worse than the cost of bailing them out, but ultimately, the Fed will not be able to stop the downturn in consumer spending. The household sector just has to retrench and repair its balance sheet. In the meantime, the result is a weak economy,” he says.
Fazzari notes that the stimulus packages proposed by Congress and the presidential candidates could be useful as well, but even those policies aren’t nearly large enough to prevent a deep recession.
“With those proposals, we’re talking about something that is a quarter of the size of what’s necessary to turn things around.”
Editor’s note: Professor Fazzari is available for live or taped interviews using Washington University’s free VYVX or ISDN lines. Please contact Shula Neuman at (314) 935-5202 for assistance.