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Home Publications Blogs Beat the Press Consumers Are Spending Faster Than Normal

Consumers Are Spending Faster Than Normal

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Sunday, 09 January 2011 10:26
The NYT had another piece suggesting that pessimism about the economy is preventing consumers from spending more. Actually, the current 5.5 percent saving rate is well below the post-war average, which is close to 8.0 percent. With tens of millions of baby boomers approaching retirement with almost no wealth, and many of the politicians in Washington planning to cut back Social Security and Medicare, it would be reasonable to expect the saving rate to rise rather than fall, meaning that consumption will weaken in the future.
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written by PeonInChief, January 09, 2011 10:29
It's unlikely that the savings rate will rise in the near future, as wages are stagnant or falling while prices for necessities are mostly increasing. What's most disturbing about it (aside from the fact, of course, that many households are struggling to provide the basics) is that much of the increased savings is nothing more than paying down debt. It's not people salting money away in their retirement funds.
Low Consumption Demand Explained by Game Theory
written by izzatzo, January 09, 2011 11:54
After a series of game theory experiments, behavioral economists concluded that the reason people aren't spending more is because people aren't spending more.

Participant expectations were divided up in a Keynesian Prisoner's Dilemma Box between spending more if others spent more, versus spending less if others spent less.

Experimenters concluded that when two consumers tattle on each other that spending is too low, they both lose their jobs, where if each consumer refuses to rat on the other, both keep their jobs - because when each one expects the other's spending to be higher than it actually is ... actual spending by each actually increases to meet expectations and results in full employment.

Unfortunately the study wasn't published since all funding has been cut off for economic analysis not consistent with Steady State Unemployment Outcomes by Austerian Economists.
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written by PeonInChief, January 11, 2011 5:51
One other thing: while the long-term average may be 8%, the savings rate hasn't been that high since 1985 (8.2%), and the highest savings rate over the last 20 years was 7.3%, in 1992.

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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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