What the 2010 Recovery Needs Right Now

This is a very reasonable economic forecast for 2010 from AEI's John Makin (via Jon Chait's great new blog.) Chait focuses on the part that says the stimulus boosted GDP by 4%, and wonders whether Republican senators will bother to read that part. Fair enough. I want to focus on the part about consumer demand, and why it's not sustainable without more government stimulus.

When we reported that GDP growth between July and September was 3.5% (it's been revised down to 2.2%), I pointed out that families' discretionary income actually fell between July and September even as consumption on durable goods skyrocketed. The difference was government stimulus, like the housing credit and Cash for Clunkers. Makin makes the same point:

During the three months ending in October, real consumer spending rose at a 2.6 percent annual rate while real disposable income rose at a 0.6 percent annual rate. Whether spending can continue to grow substantially in excess of income growth, and therefore draw down savings, remains one of the major uncertainties overhanging the U.S. economy as we move into 2010.

This provides a chicken-egg conundrum. Employers won't grow the compensation pie unless they see sustainable demand for their goods or services. They won't see sustainable demand for their goods and services unless Americans keep spending money. Americans won't keep spending more money than they're getting from employers. It seems to me that the only way to complete the circle is to continue to rely heavily on government stimulus, in the form of tax credits for employers to hire or employees to spend.

If we're going to see a robust recovery next year, the most likely driver is still exports. The American consumer still needs crutches to stand, but the Asian consumer is on a tear. The '00s boom was fueled by American demand, but in the recovery it's America that will be leaning on China and India to buy our stuff and bring us back to full employment.