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Home Publications Blogs Beat the Press Consumers Aren't Being Cautious, They Are Spending As Much as We Can Reasonably Expect Them to Spend

Consumers Aren't Being Cautious, They Are Spending As Much as We Can Reasonably Expect Them to Spend

Thursday, 14 August 2014 07:20

In its report on retail sales in July, the Washington Post told readers that consumers are being "cautious," since there was little increase from June's levels. Actually, with the saving rate hovering between 4-5 percent of disposable income, consumers are spending about as much as we can reasonably expect them to spend.

The current saving rate is well below the level of the pre-bubble years, which averaged close to 8.0 percent. The ephemeral wealth of the stock and housing bubbles drove the saving rate to lower levels. But if we pull out these unusual periods, the current saving rate is unusually low, not high as the Post article would imply.

Comments (8)Add Comment
Fundamental flaw in macro economics
written by Dave, August 14, 2014 9:04
I think there's a fundamental flaw in standard macro economics. Standard macro assumes that the Wicksellian curve can explain how lowering interest rates can encourage investment. But then we hit the liquidity trap.

It should be obvious that the funds being held for investment in bank accounts aren't going to be invested without growth to justify it. It should also be obvious that those funds, for whatever reason, cannot be directly turned into consumption.

Most individuals operate with a tradeoff of consumption and investment. Many of them would turn their investment funds into consumption if faced with an investment market that cannot provide gains. However, the institutional investors of today cannot do that or don't want to do that. Either they are intermediaries for dumb money, or they are direct investors who have no intention of ever consuming their gains; rather, they use that capital to maintain their control over society and our economy. These are investors that Summers would call 'political' investors, in that they don't act 'rationally' or according to Wisksell's assumptions.

This should have been obvious a long time ago. There are always 'political' investors who's main goal is to maintain control. Everyone to some extent would engage in this if they had the means. People don't want to maximize their consumption potential, they want to maximize their control over their own destiny and the destiny of their offspring. This far outweighs the desire to maximize consumption.
written by Dave, August 14, 2014 9:39
The failure to distinguish between groups of people, such as workers vs. institutional investors, underlies this failure of macro analysis. The macro guys don't like to go there because it leads to the need for some micro analysis to make sense of it. These guys tend to stay out of monetary policy except to hold these assumptions as truth: that lowering interest rates and QE can only help, and so they advocate pedal to the metal on QE. The monetary-oriented people tend to be dominated by the U of C, and these people tend to go way too far into micro analysis, and they tend to make ridiculous assumptions about greed and maximization. In essence the monetary, micro foundations people tend to aggregate motivations and behavior whereas the macro, fiscal types aggregate financial data. Both groups aggregate incorrectly, and so there's been no meeting of the minds and an almost permanent disconnect.
Can this be resolved?
written by Dave, August 14, 2014 9:53
Yes, it can. Perhaps it can be resolved for the next century if people would realize the simplicity of the mistakes people are making.

There are a lot of people within the economic profession that just accept imperfection as inherent in the field. Of course imperfections in models are always going to exist. However, rather than solve the problems, most economists go directly for the money -- that is, they try to use the imperfections to make lots of money for themselves and their employers. These types have a vested interest in maintaining the confusion and obfuscation of macro models. They tend to focus on temporary behavioral correlations for maximizing trading gains for institutional investors. They also tend to believe that the emergent nature of economic models will never be able to keep up… but keep up with what?

These folks aren't talking about macro. They're talking about fooling the investment markets to their own gain. They have no interest in improving macro models.

Who's gonna get there first?
written by Dave, August 14, 2014 10:12
I figured if I pointed out the problems, that some opportunist economist would jump on it and win the Nobel. I was wrong. The political problems in the field and the financial needs of economists seem to trump the desire to wade through the mine field.

Oh well.
Correlation vs. causation
written by Dave, August 14, 2014 11:10
Monetary policy has always encouraged investment and consumption. But which people did what in greater volume? Did some people think that the increase in consumption was part of an aggregate rational behavior of investors? That perhaps the present value of money was outweighing the future value of money for the purposes of consumption? Sorry, that is wrong. There's no smooth function there. The aggregate doesn't distinguish between groups with different fundamental motivations. It never did. It was always wrong.
written by Ellis, August 14, 2014 12:18
According to the article, analysts blamed sluggish wage growth for the anemic retail sales. But then the article says that wages actually fell over the last year.

I don't get it. Can wages grow and fall at the same time?
Which Consumers?
written by gary fitzgerald, August 14, 2014 1:03
The article wasn't referring to all consumers, just those who matter, the top 5% of wage earners. Clearly, focusing on Macy's should have been the hint you needed to understand that they aren't concerned about the spending habits of people who shop at the Dollar Store. If the top 5% are cautious, it must mean that not enough attention is being paid to corporate profits and stock market gains.
written by Vedicculture, August 14, 2014 4:38
consumer spending surged in the 2nd quarter and retail sales were well above average. Once again, this data point is missed.

I am sick of the monthly "mumbling" by these so called analysts. Either follow what is going on, or stop posting, writing and being flat stupid.

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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.