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Dear NY Times: Spending Isn't the Problem

Editor, The New York Times

620 Eighth Avenue

New York, NY 10018

To the Editor:

Reciting Keynesian mythology, Daniel Gross writes that "for this recovery to mature, broaden and persist, the greatest economic force known to mankind – the American consumer – has to get back in the game" ("Credit for the Recovery," Oct. 6). In fact, consumers have never been out of "the game": in the second quarter of 2010, personal consumption spending was at an all-time high of $10.46 trillion – more than 70 percent of GDP.

The problem isn't inadequate consumer spending; the problem is private investment made inadequate by the prospect of higher taxes and a barrage of burdensome and vague regulations.  As economist Robert Higgs noted a few days ago, "In the most recent quarter, gross private domestic investment was still running at an annual rate more than 20 percent below its previous peak. Net private investment was fully two-thirds below the previous peak."*

For policy makers to focus on reviving consumer spending while private investment is drying up is like a homeowner focusing on installing more walls while the foundation of his house is crumbling.  The fact that the bulk of the house's surface area is made up of walls does not mean that walls provide the house with its principal support.


Donald J. Boudreaux

Don Boudreaux is the Chairman of the Department of Economics at George Mason University and a Business & Media Institute adviser.<?xml:namespace prefix = u1 />

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