WHY CAN’T WE BOOST AGGREGATE DEMAND AND EASE THE ENERGY STRAIN?

There’s a lot of political debate over the cause of the continuing economic weakness.  For anyone who has ever run a business, the answer is pretty simple – where there is demand there is expansion.  Sure, government can impede growth through various programs and regulations, but the bottom line is that companies expand when the top line expands, resulting in bottom line growth leading to the ability to leverage up operations.  Revenues are, without a doubt, the single most important component of any business.  To assume otherwise is the entrepreneurial equivalent of sticking your head in the sand.

We’ve heard this endlessly from CEO’s in recent weeks including Union Pacific’s CFO, Google’s CEO Eric Schmidt, and most recently was John Faraci, International Paper CEO, who succinctly explained the problem to CNBC:

 “to create jobs what we need is demand. This economy is 70 percent consumer driven, so we need consumers spending some of their discretionary income if we’re going to have demand that’s gong to lead to more jobs.”

“If we get demand, we’ll put more shifts on, our employees will be working more hours, and we’ll hire more people. Without demand we can have all the certainty in the world and all the clarity about regulation, but to me it’s not so much about confidence as it is about demand,”

This was further cemented by last week’s NFIB Small Business Survey:

“Sales remain the largest problem for small firms—a full quarter identifying “poor sales” as their top business problem. The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months lost 1 percentage point, falling to a net negative 9%, with more firms with sales trending down than up. Not seasonally-adjusted, 27% of all owners reported higher sales (last three months compared to prior three months), down 2 points from the prior month, while 28% reported lower sales (unchanged). Expectations for future sales are also in decline, with the net percent of owners expecting higher real sales falling 10 points in August, to a net negative 12% of all owners (seasonally adjusted), 25 points below January’s reading. Not seasonally adjusted, 21% expect improvement over the next 3 months (down 6 points) and 34% expect declines (up 7 points). Owners appear to have lost confidence in the economy and the government’s ability to assist the recovery. “

The one realistic place where we appear to be hearing the persistent “government intrusion” theme is in the energy sector.  Clearly, we have big problems in the oil sector as last week’s CPI report showed.  The energy component is up 18.4% year over year despite core inflation of 2%.  That’s an astounding statistic in a global economy that is clearly slowing.  As Shell’s CEO said last week, we have a long-term supply/demand imbalance in the oil markets and we need to be doing everything in our power to ease the economic strain oil is causing.

Interestingly, it seems like our government has all the wrong solutions to our current issues.  What we need in this balance sheet recession is a way to increase demand when private sector demand remains suppressed by the debt burden.  I believe a tax cut is the obvious bi-partisan answer.  While we’re at it, why not kill two birds with one stone and give the Republicans their reduced regulations in the energy sector and help ease the oil burden?   It seems like a no brainer to me.  Let capitalism unleash hell on the oil crisis that is brewing and give debt strapped Americans a much needed tax break.  Amazingly, we might not get either one….And that’s why muddle through is almost guaranteed to persist….