As we talked about in class, saving today is good for future economic growth. But as we shift away from consumption the economy will worsen in the short-run. Clearly this has important policy implications. So what's the solution. Well apparently it's a little of both. We need to spend and save.
What policies can we implement. I still think the number one problem is household debt. Many households own more on their homes than what they are worth, throw in consumer debt (credit cards and car loans) and student loans it's easy to see why households are reluctant to spend. A well structured loan modification program will reduce household monthly debt payments. This needs to be followed up solidifying the Bush Tax cuts for at least the households earning less than $250,000, and with investment tax credits for businesses.