Thursday, February 5, 2009

The Spending Myth

It is very often said that low spending is the fundamental problem in our economy. This is wrong.

Note that income and spending fell less then 1.0 percent from Q3 to Q4. Labor hours fell twice as much.

So why is spending said to be the cause, and labor hours the effect?!

This looks to me like a problem with the labor market, which spills over a bit on income and spending.

This means two things:
  1. attempts to stimulate spending, even if they actually stimulate the spending, will have only an indirect effect on employment (given some of the bad incentives of the stimulus plans, the effect on employment may be in the wrong direction!).
  2. income and spending will head up before employment does. Income and spending may already be headed up!


dWj said...

I've been hearing for years that people aren't saving as much as they should be. Now the concern is that we have to stimulate C, and apparently G, to get the economy going again. What about I? (NX may be implausible for a while.) I keep hearing that tax cuts that don't lead to C are "wasted". I don't buy it, for any understanding of the word "wasted".

Boonton said...

1. Where are your numbers coming from? Are they seasonalized. An unseasonalized dip of 1% from Q3 to Q4 is very dramatic since Q4 is has the Holiday boost.

2. Your assertion seems to be at odds with numerous reports of large drops in retail spending, luxury spending, rest. spending, entertainment spending etc.

3. What is a typical change from one quarter to another? Without that it is hard to say if 1% is a little or a lot.

4. Keeping in line with #2 and #3, are you treating inventory buildup as spending? Inventory increases boosted GDP by something like 1.7% in 2008. This is spending in the sense that businesses have to buy inventory but it's not very good because businesses buy inventory to sell, not to keep on their floors. If inventory is building up unsold the result is a lot less orders for next quarter.