BOOST PRIVATE INVESTMENT TO BOOST THE ECONOMY

January 8, 2009

These days it seems like it is our patriotic duty to consume more.   And if we don't choose to spend more money ourselves, the government will do it for us.  In the case of the U.S. economy now, the double-whammy of wealth shocks from the real-estate bubble and the stock-market crash has made consumers understandably cautious.  They want to consume less and save more.  Unfortunately, savings are not getting translated into investment

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson have rightly concentrated on getting the financial sector functioning again, since lending is a critical ingredient for private-sector investment.  But what about spending, asks Hal Varian, a professor of economics at the University of California, Berkeley, and chief economist at Google?

  • Direct stimulus of consumption is tricky; in this economic climate, most of the money returned to consumers from tax cuts would probably be saved instead of spent.
  • That brings us to government spending, which is getting most of the press; its danger is twofold: First, it takes too long for government spending to kick in, and second, spending may easily focus on pork-barrel projects that have little inherent value.

Private investment hasn't been getting nearly as much attention as it deserves, yet it is what makes possible future increases in production and consumption.  Investment tax credits or other subsidies for private-sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure.  But if private investment doesn't increase, where will the extra consumption come from in the future?

Ultimately, we want to end up with a significantly higher savings rate in the United States than we have seen recently.  That means some other component of demand must increase to compensate for the reduced consumption.  And the most attractive candidate by far is private investment.

Source: Hal Varian, "Boost Private Investment to Boost the Economy," Wall Street Journal, January 7, 2009.

For text:

http://online.wsj.com/article/SB123129443022559731.html 

 

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