Weak confidence is driving the anemic hiring. Can more government intervention fix the problem?
The stimulus package proposed by President Obama last night should be considered in light of the two biggest headwinds that the U.S. economy faces: pessimistic consumers and a broken housing market. Yesterday, I explained that the part of the stimulus meant to help slow foreclosures won't work. But what about the other obstacle to recovery -- will another stimulus package boost consumer confidence? Looking at the shifting sentiment towards government, it probably won't.
First, why is confidence so important? It influences spending. If Americans feel good about the economy, then they are more likely to save less money and spend more. That will result in more hiring as firms try to satisfy rising demand for goods and services. So no matter how clever or theoretically effective Obama's proposals are, their success or failure relies on what consumers and businesses actually do with the money the government is injecting into the economy. This means that Americans' growing cynicism towards government could doom a new stimulus package, even if a miracle happens and it manages to pass.
The Psychology of Stimulus
Back in September 2009, opponents of Obama's first stimulus declared that it didn't work. They said that it was, thus far, ineffective and backed up their claims with some data. But I argued that whatever data they might supply can't possibly provide the whole story: we can't fully understand what the world would have looked like without the stimulus package.
In particular, we cannot know for sure how Americans would have felt if the government had merely done nothing. Rewind to early 2009. The economy's sores from the financial crisis were still open and bleeding. Unemployment was rising quickly. Excitement about "hope and change" in Washington had energized the masses. If the government had just shrugged, then consumer confidence would probably have plummeted. At that time government stimulus provided a psychological benefit, which almost certainly had a positive effect on consumer confidence. Even if it didn't boost confidence dramatically at the time, it likely prevented it from falling farther.
Now fast-forward to September 2011: will consumer confidence benefit if another stimulus bill is passed? This question matters a lot, because consumer confidence remains the biggest obstacle to more jobs. Firms are overwhelmingly complaining that a lack of demand is causing their slow hiring. Any other problems they face are secondary. For example, if a firm doesn't foresee consumers wanting more of its products in the near- to medium-term, then a government incentive for hiring will be ignored.
Americans' Shifting View of Government
If you've been paying attention to politics lately, then you know a huge shift has taken place in Washington to prioritize deficit reduction. This shift was caused, in part, by Americans' understanding that the federal government's finances are on an unsustainable path. Americans viewed the problem as so serious that just 22% wanted Congress to vote in favor of raising the debt ceiling when asked in July, according to a Gallup poll.
Of course, the debt ceiling is a complicated issue, so some polling more specific to how another stimulus might affect sentiment would be helpful here. The best polling I could find on how Americans view the government's efforts to fix the broken economy comes from the Washington Post. Let's start with how people felt about the 2009 stimulus, just as it was passed. Here are the results to a poll that asked," How confident are you that this economic stimulus plan will make the current economic downturn less severe than it would be otherwise?"