Actually, Economists Who Know Arithmetic Are Not "hopeful that families will continue to pick up the pace of purchasing"

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Saturday, 01 May 2010 07:16

In an article discussing the first quarter GDP data the NYT told readers that: "Economists are hopeful that families will continue to pick up the pace of purchasing and make the recovery more sustainable." Economists who know arithmetic (admittedly a tiny subset of economists as evidenced by the failure of almost the entire profession to see an $8 trillion housing bubble) are unlikely to share this perspective.

Tens of millions of baby boomers are at edge of retirement. Because of the collapse of the housing bubble and the resulting destruction of home equity, the vast majority of people in these cohorts has almost nothing saved for retirement. The median net worth for older baby boomers (people aged 55-64) is around $180,000. This means that if they took all their wealth (including their current home equity) they would  have approximately enough money to pay off the mortgage on the median home. This would leave them with absolutely nothing to support themselves in retirement other than their Social Security. The median net worth for younger baby boomers (people aged 45-54) is approximately $80,000.

The workers in these age cohorts desperately need to be saving more for retirement, especially in a context where the Peter Petersons and Robert Rubins of the world are devoting enormous resources to try to cut their Social Security and Medicare. For this reason, economists who know arithmetic are not hoping for a consumption led recovery. They are hoping that the government will take further measures to stimulate the economy. These measures could also boost private sector investment. Economists who know arithemtic are also hoping that the Obama administration will take steps to end the dollar's over-valuation, thereby leading to more net exports.

Unfortunately, because economic policy is dominated by economists who do not know arithmetic, we may be dependent on consumption to drive the recovery.