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Home Publications Blogs Beat the Press Can We Get the Washington Post Editorial Board an Internet Subscription for the Holidays So It Stops Saying Silly Things About Consumption?

Can We Get the Washington Post Editorial Board an Internet Subscription for the Holidays So It Stops Saying Silly Things About Consumption?

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Saturday, 24 November 2012 08:34

People who are familiar with the Commerce Department's National Income and Product Accounts know that consumption as a share of disposable income is high by historic standards, not low, as shown in the beautiful graph below.

consump-disp-09-2012

Source: Bureau of Economic Analysis and author's calculations.

As can be seen, consumption as a share of disposable income is higher than at any point in the 60s, 70s, 80s, and even most of the 90s until the stock bubble generated a consumption boom. It is lower than at the peak of the housing bubble, but that's what happens when you lose $8 trillion in housing wealth. (Adjusted disposable income has to do with the treatment of the statistical discrepancy in the national accounts.)

Given the actual path of consumption over the post-war years, readers of the Post editorial were undoubtedly shocked to see its conclusion:

"Housing is healing, albeit slowly, as are household balance sheets. Deutsche Bank economist Joseph LaVorgna estimates that households are on course to wipe out the excessive leverage of the bubble years within 15 months. This sets the stage for renewed consumer spending."

The Post seems to be expecting bubble levels of consumption without bubble levels of wealth. That would truly be surprising, especially in a political environment in which all the serious people in Washington are openly plotting to cut Social Security and Medicare. What economic theory would tell us that we should see saving rates fall to levels that are far below normal in such an environment?

The other bizarre part of this story is that the Post seems to think that consumption is an on/off switch, telling us that households reaching some ill-described threshold of paying down of debt:

"sets the stage for renewed consumer spending."

That makes no sense. The paying down of debt is a process in which tens of millions of households are paying down debt, while tens of millions are acquiring more. We reduce aggregate debt when the former exceeds the latter. We don't hit some magic threshold and suddenly get a burst of consumption, rather we should be a seeing a continuing rise in the ratio of consumption to disposable income if the debt paydown is having the predicted effect (we haven't).

Access to the Internet could help to address the Post's misunderstanding about current consumption levels. I'm afraid that they will need some additional training in economics or logic to clear up the confusion about how debt could affect consumption.

Comments (2)Add Comment
...
written by Arne, November 24, 2012 9:53
"What economic theory would tell us that we should see saving rates fall to levels that are far below normal in such an environment? "

Actually, depending on how you define your incomes and manage your demographics, won't a 50 percent change in the ratio of workers to retirees cause a shift in this metric?
...
written by Bart, November 24, 2012 11:21

The chart shows that spending is at 95% and higher than it was during the decades of the 60s, 70s, and 80s. It approached 100% only during the bubble times.

We are told that the economy suffers from too little demand. How might demand increase given that incomes/disposable incomes are stagnant?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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