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Home Publications Blogs Beat the Press Washington Post Calls Spendthrift Consumers "Skittish"

Washington Post Calls Spendthrift Consumers "Skittish"

Saturday, 02 October 2010 07:50

The Washington Post headlined an article on the release of data August consumer spending: "with consumers skittish, hopes muted for holiday sales." The article goes on to describe weak consumer sales, which are explained by pessimistic attitudes about the economy.

In fact, consumer sales are actually quite strong given the level of income. As the article notes, the saving rate for August was 5.8 percent. This is considerably below the average for the 50s, 60s, 70s, and 80s. In each of these decades the savings rate was considerably above 8.0 percent.

The saving rate began to drop toward the end of the 80s and into the 90s as a result of the wealth effect generated by the stock market bubble. It fell to zero as a result of the wealth effect from the housing bubble. Now that most of this bubble wealth has disappeared, it would be expected that the savings rate would return to its normal level or possibly even rise above it, as households attempt to make up for lost wealth. This is especially likely given that the huge cohort of baby boomers is approaching retirement with virtually no wealth and there is widespread talk of cutting their Social Security benefits.

It is remarkable that the Washington Post could not find any economists familiar with the wealth effect on consumption. It is one of the most basic relationships in economics.

Comments (4)Add Comment
20 years of robust spending and Post can't see
written by Hugh Sansom, October 02, 2010 9:42
We have two decades of glaring evidence of just how willing Americans are to spend when we have money and income! That the Post (or NPR or the Times ...) can go on with the blame-consumers approach exactly parallels Obama's blame the liberal-critics campaign. That is, these are claims that do political work. There is no factual claim involved (except to the extent that there is a denial of fact, a denial of the obvious). Obama, the Post, the Times, etc., are on a political mission. It is at best moderate, at worst conservative. Facts be damned.
More competition and lower prices increase demand
written by Jay, October 02, 2010 12:22
Consumers are willing to spend but prices are too high. Businesses need to cut their profit margins and move more volume with less expensive high quality goods. Most Americans consumers will not compromise quality. They need good value.

Also, there is not enough competition in our economy to adjust prices and businesses are still relying on finance to maintain their bubble level prices. It's not deflation but proper valuation. The demand is gone but people still want to buy.

Most goods are made overseas for pennies but are still being sold over here at outrageous profit margins. We lose the jobs associated with manufacturing and really don't even get the benefit of the cost savings.

If anything it appears consumers are finally acting rationally.
written by UGG???, October 02, 2010 10:09
written by izzatzo, October 03, 2010 7:17
Consumers are skittish because of uncertainty about taxes and regulation. After Teabaggers bring in Newt Gingrich to close down the government, the deadly fear that drives the Paradox of Thrift will be overcome and consumers will spend again.

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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.