Higher demand and a weaker economy. What gives?

Steve Stanek Research Fellow, The Heartland Institute
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Answer me this: If the president and his economic advisors are right in claiming that the problem with the economy is too little consumer demand, why was consumer spending in the second quarter of this year higher than in mid-2007, before the recession began?

The government’s Bureau of Economic Analysis (BEA) report (last revised on August 26) shows a seasonally adjusted annualized spending level of $9.72 trillion for personal consumption expenditures in the second quarter of 2007. It shows a level of $10.66 trillion in the second quarter of 2011.

In fact, seasonally adjusted annualized personal consumption expenditures in every quarter since the second quarter of 2007 — that’s 16 quarters — have been higher than the mid-2007 level.

Current inflation-adjusted personal spending per capita is also up slightly since 2007, the BEA table shows.

Government leaders and economists have said a lot about the need to stimulate demand in the economy. President Obama’s newest stimulus proposal, announced in his Thursday night speech, embraces the belief that the government needs to create consumer demand to spur the economy.

But as the government’s own statistics show, that belief is wrong.

Have we forgotten President Bush in 2008 signed a $162 billion “economic stimulus” that included tax rebates and incentives for individuals and businesses? Have we forgotten President Obama in 2009 signed a much bigger $826 billion stimulus that included tax breaks and increased spending? That’s nearly $1 trillion of stimulus that did not stimulate.

Keynesian economists tell us governments must borrow and spend to spur economic activity. Governments love that idea, and they repeat it endlessly. When Bush became president in 2001, the national debt was $5.7 trillion. It now tops $14.7 trillion and continues to climb. Annual federal spending has risen from $1.8 trillion to approximately $3.8 trillion in 10 years.

All that spending, and still the economy languishes.

Consumption is not creation. If nations could spend themselves to wealth and power, there’d still be a Roman Empire.

Innovation and investment create industries that create demand and maintain existing industries.

There was no demand for automobiles until someone created one. There was no demand for telephones, record players, light bulbs, televisions, computers, iPads, microwave ovens or anything else until these things were created.

Now, however, with economic central planners in the Federal Reserve, Treasury Department and White House, the nation’s resources are increasingly being directed to the politically connected and powerful.

Laws thousands of pages long have been enacted in recent years, with many more thousands of pages of regulations still to be written.

Recently we’ve seen our government shut down Gibson Guitar Co. with no criminal charges being filed. We’ve seen the National Labor Relations Board try to block Boeing from opening a new aircraft factory in South Carolina. We’ve seen our government shred established bankruptcy law and harm bondholders to take over major automakers and hand partial ownership to labor unions that helped ruin the automakers in the first place.

We’ve seen our government hand bailouts to mammoth financial firms to the detriment of smaller financial firms and Main Street businesses. We’ve seen money printed out of thin air and more money borrowed with no concern for future taxpayers who will have to pay it back.

None of this is good for innovators, inventors and investors who thrive on freedom and risks but not suicidal gambles. Many have concluded the risks from government interference, regulation, harassment, future taxation and favoritism for competitors are too great.

No amount of short-term tax cuts, stimulus spending and the like will overcome wrong-headed and abusive notions of the government’s role in the economy.

Steve Stanek (sstanek@heartland.org) is a research fellow for budget and tax policy at The Heartland Institute.