Warren Buffet’s Berkshire Hathaway had its worst decline ever last year, the Dow Jones Industrial Average had its worst February (and March is coming in like a bear), there’s a record number of Americans signed up for unemployment, and AIG reported the worst corporate loss in history. Construction spending is down, manufacturing is down, and U.S. gross domestic product eroded by 6.2 percent in fourth quarter (revised downward from 3.8 percent). In what most economists call a statistical fluke, personal spending and income edged up in January; in what economists believe is a trend, personal savings jumped.
Americans are buying things, just not as much stuff. U.S. auto sales are spiraling down further, for example, even though they’ve hit 34-year lows, according to CIBC World Markets. CIBC’s corporate and investment banking unit expects U.S. auto sales to decline another 30-40 percent to 8-9 million vehicles annually during the next five years. “Just as two million housing starts proved to be a bubble, so was the average 16 million unit auto sales of the last five years,” states Jeff Rubin, chief economist at CIBC World Markets.
The American Recovery and Reinvestment Act of 2009 may not be enough to turn the tide. “I agree with those who see the fiscal stimulus package as being too small to fill the crater in the economy,” says Timothy A. Canova, professor of international economic law and associate dean at Chapman University School of Law. “Even assuming a Keynesian multiplier of 1.5, the present stimulus package may not be large enough to get the economy back to zero. My back of the envelope projection is that it could require another $300 billion for this year just to get the economy to zero growth. Of course the objective should be to renew the economy to positive growth territory. That means perhaps $500 billion in extra stimulus.”
Another weakness in the current stimulus is its “more than $300 billion tax cuts,” Canova believes. “Tax rebates will not add a lot of purchasing power, much of the tax cuts will be spent on imports or hoarded,” he contends. “It’s not the best bang for the buck. Another drawback: “The final stimulus package stripped out $40 billion plus in aid to state and local governments, at a time when belt tightening by state and local governments will reduce aggregate demand.”
Canova says the G.I. Bill of Rights spending on higher education “provides a most sensible model” for the kind of stimulus needed for long term growth. He recommends that the federal government “create a national service program for any able-bodied citizen willing to serve in the military or civilian service for at least two years, perhaps three. This would be an instant stimulus in the form of income for those serving. After service is complete, all who serve should be eligible for a tuition-free four -ear higher education with living stipends. In short, the same deal that made the Greatest Generation great and kept the U.S. economy from falling back into depression after the World War II stimulus was ended.”