A comment I made on the post, Pity the Poor Keynesians.
I work for a small business and our number one issue is that our sales are down from last year. The one strategy that has worked for us has been to reduce costs and become more efficient. This strategy appears to be a very common business strategy in 2010. Neither the latest stimulus or the previous stimulus during the Bush administration have shown any resemblance of increasing aggregate demand in areas that translate into increased sales for our business. Increased governmental spending during a recession as a way to stimulate the economy is a policy attributed to Keynes. At its core this policy depends on tricking the consumer to spend more. If the consumer goes along with the trick then each dollar spent by the government should result in several dollars of increased consumer spending. Unfortunately the consumer did not take the bait in 2008, 2009, or 2010. In this recession the Keynesian multiplier looks like it is yielding less one. In other words we got less than a dollar benefit for every dollar spent. This should not be surprising since most of the stimulus money was spent on government transfers payments rather than spending on infrastructure such as roads. Although the Keynesian economists claimed that spending on transfer payments should have the same effect as spending on infrastructure, the results for this economy seem to indicate otherwise. Considering that it has become cool to be frugal and pay down debts, it is unlikely that continued use of deficit spending to stimulate the economy will ever work with this group of consumers. This leaves our Keynesian supporters in a quandary about future spending plans to increase consumer spending and reminds me of this quote.
Insanity: doing the same thing over and over again and expecting different results.
Since the government plans are not working and our government doesn’t have a clue on how to fix the economy, businesses are left to deal with their problems in what ever way they can. Since businesses are facing a lot of operational, financial, and regulatory risks, it is likely that they will continue to focus on cost control and avoid making major commitments. That is not hard to figure out. There are so many risks out there right now it is unlikely you will hear them singing, “Happy days are here again!”, any time soon. What you saw from businesses in the first six months of 2010 is probably what you will see for the entire year. It is a given that there will be no jobs recovery in 2010. What may be unexpected is that the dropping business and consumer confidence is pointing to a stalled recovery scenario for 2011. Considering the budget deficits facing most of the states and the likelihood of a stalled economy, the economy is likely to get uglier in 2011 and 2012 rather than better.