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Home Publications Blogs Beat the Press NYT Tries to Explain Why Unusually High Levels of Consumption Are Not Even Higher

NYT Tries to Explain Why Unusually High Levels of Consumption Are Not Even Higher

Monday, 15 August 2011 04:20

One of the bizarre statements that is routinely repeated by people who should know better is that consumers are not spending and that is one of the reasons that the recovery has been so weak. The NYT has a piece along these lines this morning. The reason why this argument is bizarre is that consumption is still unusually high, not low.

The saving rate out of disposable income has been averaging just over 5 percent for the last 3 years. This is above the near zero rate at the peak of the housing bubble, but still well below the 8.0 percent average that households averaged for most of the post-war period prior to the growth of the stock bubble in the 90s and the housing bubble in the last decade. (Due to measurement issues, specifically capital gains showing up as income in the national income accounts, the official data likely understate the drop in savings at the peak of the bubbles and the subsequent rise since the crash.)

The predicted result of the ephemeral wealth created by these bubbles would be a surge in consumption, which implies a drop in the saving rate. Now that both bubbles have deflated we should expect the saving rate to return to normal levels or perhaps even somewhat higher as households must make up for the years when they did not save adequately.

This is one of the reasons that competent economists saw these bubbles as so dangerous. Once the economy gets on a specific growth path it is difficult to change courses. Specifically, it is not easy to find a source of demand to replace $600 billion or so in lost consumption coupled with $600 billion in lost bubble-driven construction demand.

Click for Larger Image.


Source: Bureau of Economic Analysis.

Comments (5)Add Comment
written by foosion, August 15, 2011 8:07
Consumption is high as a percentage of income, but level of consumption (and of disposable income) is lower than it should be. It's not that consumers should spend a higher portion of their income, it's that their income should be higher so that they'll spend more.
Spiritual Journalism
written by Union Member, August 15, 2011 8:10

Ephemeral wealth created by ethereal journalism.
written by skeptonomist, August 15, 2011 9:37
The Times writers seem to be under the bizarre illusion that interest rates have a direct effect on consumer behavior. An even more bizarre idea is that the announcement that the Fed would continue its policy of the last 2 1/2 years would spur a sudden burst of consumption. Economists have apparently transferred their obsession with interest rates and Fed policy to beat reporters.

The ridiculously usurious rates on credit-card debt show that consumers don't really care about interest rates. Interest rates are important for major purchases, such as houses, but the decision on eligibility for a mortgage is made in most cases by the issuing bank or other institution, not the consumer. When mortgage bundling and CDS's short-circuited this limitation and the decisions were left up to consumers, the result was a housing bubble which got us where we are now.

Interest rates are important for banks and speculators - it's their business. Consumers don't really care.

And speaking of consumers, banks and credit cards, the pattern of saving which Dean shows is mirrored by revolving or credit-card debt:


Savings started downward about the time that credit cards became widely available. Stock-market and housing wealth may affect savings, but the effect of credit cards, which are a big profit-maker for banks, should not be ignored.
written by PeonInChief, August 15, 2011 11:36
The savings rate actually began its decline not with revolving credit (in fact, the savings rate is higher from 1970 to 1989 than in the two decades preceding, 1950 to 1969), but in 1987. Possible explanations are the increasing share of income taken up by housing and health care costs, as boomers become dominant in the owned housing market. The real crash in the savings rate begins after 1998, when the savings rate falls below 5%, and doesn't get back there again until 2009.

I don't expect that the savings rate is going to rise much above 6%, simply because wages are falling, while the cost of basics continues to rise.
written by Ben, August 15, 2011 8:57
Hi Peon,

You should read some of Dean's other posts on the issue and the drop in savings in 1998 is no mystery. At the same time the US Government is running a surplus so borrowing was shifted to households and businesses.

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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.