10 Ways to Get Americans Spending Again

Lack of consumer spending is holding back the recovery. Here are ways to get shoppers back in the game

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Despite years of near-zero interest rates and government stimulus programs, American consumers have not recovered their spending appetites. They are still reeling from big mortgage and other debts, facing stagnant wages and long-term unemployment, and desperately seeking reasons to once again believe in the American Dream.

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Since consumer spending is responsible for more than two-thirds of U.S. economic activity, employers are reluctant to hire people until they see more demand. So while corporate profits continue to soar, those trillions of booked earnings stay on the sidelines while economic growth sputters.

Many of the most impartial judges of the U.S. economy and government fiscal policy can be found overseas, in governments and financial institutions, and among the many organizations that hold half of our public debt. They have a big stake in U.S. financial stability. And they're not running for elective office in the United States in 2012.

For the most part, our foreign creditors want to see evidence that the United States is on a sustainable path toward meaningful reductions in annual government deficits. If this evidence was coupled with more short-term stimulus, their reaction would be, for the most part, favorable. But any short-term stimulus must be part of a longer-term plan—a binding plan—to reduce deficits.

In a recent overview of the U.S. economy, the International Monetary Fund (IMF) listed two main concerns about the country's fiscal condition and deficit fight. One was default. The second was steep spending cuts, or what the IMF described as "an excessively large upfront fiscal adjustment that would significantly weaken domestic demand." Sorry, that's the way economists write.

"A politically-backed medium-term framework that raises revenues and addresses long-term expenditure pressures should be the cornerstone of fiscal stabilization," the IMF said in the report.

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Here are 10 ideas that have been widely suggested by economists and others to get consumers back into the game. Don't expect to find quick fixes. As the nasty debt-ceiling fight shows all too well, the United States has run out of easy solutions. Also, many ideas involve short-term increases in government spending. Maybe this seems like a non-starter. Many people think horrendous deficits are what got us into this fix in the first place. There is an enormous gap between liberal and conservative thought here, and it's not going away. Increasingly, however, many fiscal experts have come to believe that government stimulus programs of the past two years were too small and not effectively targeted to create a lot of new jobs. The failure of those stimulus efforts does not, by itself, mean that stimulus programs don't work.

1. Boost consumer confidence. The very public food fight between Republicans and Democrats has been terribly damaging to public confidence. Our "leaders" need to discuss their differences in less hostile ways, reach a solution, and give Americans some reason to trust that their national government has their best interests at heart. Even if sharp differences remain, Congress and the White House should abandon their scorched-earth politics.

2. Agree on a long-term deficit reduction plan. Yes, this is a no-brainer. But we haven't seen one yet. To be credible, the plan must address healthcare and other entitlement programs. Don't expect seniors to applaud fiscal restraint that comes at their expense. But they know cuts are coming and will accept them, particularly if accompanied by higher taxes on wealthier Americans. Shared sacrifice must be apparent.

3. Start fixing the mortgage mess. It will take years to work off the excesses of the housing bubble. But the clock won't start moving in earnest until and unless the government does a more effective job of speeding the review of troubled mortgages and helping to get them cleared off the books. These mortgages are a toxic overhang to a housing recovery, and the lack of home purchases and new-home construction is a huge drag on the economy.

4. Continue the payroll tax breaks for Social Security taxes. President Obama supports an extension through 2012 of this year's two-percentage-point reduction in the employee share of Social Security payroll taxes. The reduction reduced the tax to 4.2 percent from 6.2 percent of covered payroll, up to $106,800 in annual wages.

5. Extend unemployment benefits. Long-term unemployment is becoming a terrible legacy of the Great Recession. As more and more Americans find themselves out of work for a year or more, their financial safety nets have become shredded.

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6. Expand job-training efforts. Job skills erode quickly in a knowledge-based economy. If we want to help reduce long-term unemployment, we need to step up our efforts to refresh and enhance job skills. Many job openings now go unfilled for lack of skilled applicants.

7. Adopt a government stimulus program for public works. Much of our infrastructure is decaying and at risk of falling apart. What better time to address these needs, and will prices ever be cheaper? There is great unused capacity and labor for this work. But let's do it smartly, with strong federal-local partnerships that define high priority work that's ready to be done soon.

8. Let the government negotiate lower drug prices for Medicare beneficiaries. Medicare is not allowed to negotiate drug prices with pharmaceutical companies. Bills are regularly introduced to overturn this outdated nod to the myth of private price competition for branded prescription drugs. I guess we could all move to Canada, where drug prices are sharply lower than in the United States. But maybe there's a better way.

9. Encourage just a bit of inflation. Somewhat higher interest rates would help to get capital off the sidelines in search of more attractive returns. It also would help reassure seniors by boosting their earnings on conservative retirement investments.

10. Strengthen the dollar. Higher interest rates also should boost demand for dollar-denominated assets. This will give American consumers more buying power for imported goods. If you want consumers to spend more money, give them more money to spend. A stronger dollar fits this bill. A stronger dollar would make it harder for U.S. firms to sell their exports. But the IMF study said that strong export activity by U.S. firms has not been contributing to overall domestic economic growth.

Twitter: @PhilMoeller