"It's the Aggregate Demand, Stupid!"

Conservative economics consultant Bruce Bartlett (he worked as an adviser to President Reagan) offers a column in the New York Times that puts the focus on what's holding back economic recovery.  Hint - it's not businesses lacking the capital to re-invest because of high taxes, nor does it have anything to do with deficits. It's the fall in consumer demand - primarily because of high unemployment, depressed wages and the hit people took as equity in their homes disappeared due to the disaster caused by the financial sector in 2008.

The demand crisis is pretty basic economics and well-established, but it's a fact that bears repeating in the current Bizarro World economic debate driven by opportunistic or profoundly ignorant clowns playing to the Tea Party base of the GOP (Rick Perry, Michele Bachmann, Paul Ryan, et. al.) who preach anti-government radicalism as the path out of our current crisis.  Bartlett also points to the role of the Federal Reserve as one of the few areas where something can be done that doesn't require the acquiescence of a GOP Congress intent on bringing the President down by stalling recovery.

What passes for "conservatism" these days is so unhinged, ill-informed and mired in resentments that the occasional authentic conservative commentator like Bartlett - trying to make sense of the problems we face and to move beyond rabidly partisan soundbites or fake Tea Party "populism" - is a breath of fresh air and deserves to be heard:

With the debt limit debate temporarily set aside, the Obama administration is talking about finding some way to create jobs and stimulate growth. But the truth is that there really isn’t much it can do and it knows it. There may be some small-bore things it can do without Congressional action that may help a little, but the operative word is “little.” The only policy that will really help is an increase in aggregate demand.

Aggregate demand simply means spending — spending by households, businesses and governments for consumption goods and services or investments in structures, machinery and equipment. At the moment, businesses don’t need to invest because their biggest problem is a lack of consumer demand, as a July 21 study by the Federal Reserve Bank of New York documented...

Nonfinancial businesses are now sitting on close to $2 trillion in liquid assets that could be invested immediately if there was an increase in sales, and banks have $1.5 trillion of excess reserves that could be lent as well.

Fiscal policy could raise velocity and growth by getting money moving throughout the economy. But since that is not feasible, the Fed is the only game in town. Joseph Gagnon, a former Fed economist, says that it should immediately increase the money supply by $2 trillion and promise to keep increasing it until the economy has turned around.

But the Fed is already under pressure to tighten monetary policy from its regional bank presidents, three of whom dissented from last week’s Fed decision to keep policy steady. They fear that inflation is right around the corner. But as the Harvard economist Kenneth Rogoff has argued, a short burst of inflation would do more to fix the economy’s problems than any other thing. One reason is that inflation raises spending by encouraging consumers and businesses to buy things they need immediately because prices will be higher in the future.

The right policy can be debated, but the important thing is for policy makers to stop obsessing about debt and focus instead on raising aggregate demand. As Bill Gross of the investment firm Pimco put it recently: “While our debt crisis is real and promises to grow to Frankenstein proportions in future years, debt is not the disease — it is a symptom. Lack of aggregate demand or, to put it simply, insufficient consumption and investment is the disease.”

The entire column, which includes a more technical discussion of the money supply, is HERE at The New York Times' "Economix."