The economy needs a heavy dose of consumer spending, contends economist and New York Times columnist Bruce Bartlett. And the best short-term solution, he says, would be an increase in the money supply by the Federal Reserve, which would kick off a wave of inflation and encourage consumer spending and investment.

Bartlett, a former member of both the Reagan and George H.W. Bush administrations, points out that the biggest problem for businesses right now is a lack of consumer demand, and adds that what we need to see is “spending by households, businesses and governments for consumption goods and services or investments in structures, machinery and equipment.”

So spending on a large scale would help turn around this economy, but as Bartlett points out, increasing consumption is difficult when unemployment is high and households are trying to rebuild savings decimated by the collapse of the housing bubble. Therefore, he says, it is up to the Fed, to provide the means to this end by increasing the money supply—and triggering a rise in inflation—in order to encourage spending.

The Fed is already doing this to some extent—Bartlett points out that the money supply has increased by $2 trillion since 2006. But the fall in home values, plus the tendency of consumers, businesses and banks to hoard every penny they have, means there's still less money circulating today than five years ago. But is a focus on inflation the right solution to the county's economic woes?

"Inflation raises spending by encouraging consumers and businesses to buy things they need immediately because prices will be higher in the future," Bartlett writes. He goes on to state that the right policy can be debated, but the important thing is for policy makers to stop obsessing about debt and focus instead on raising demand by consumers and businesses.

It’s the Aggregate Demand, Stupid [New York Times]
Why Small Business Were Hit Harder by the Recent Recession [Federal Reserve Bank of New York]