the powerful consumer?

[Dave Backus @ NYU]

A casual reader of economic news can’t help but get the impression
that the way to get the economy moving is to have people spend more --
consume more, in the language of macroeconomics. Seems obvious,
doesn’t it? At the risk of making the obvious complicated, I’d say
it’s not so obvious. It’s also not obvious that consumption has gone
down since the crisis, or that saving has gone up. So what’s going on
with the labor market? Good question, let me hold off on that.

David Leonhardt’s piece in today’s Times (link at the bottom) is a
good example of the genre: hiring is low because people aren’t
spending enough. He’s a wonderful writer, but I don’t buy this one.
To start, there’s the issue of causality -- does spending drive the
economy or the reverse? Honestly, it’s hard to say. But there are
also some issues of fact that don’t fit the consumption bust story.
Among them:

* The dollar value of consumption hasn’t dropped at all as a fraction
of GDP. In fact, it’s at an all-time high. See line 2 of

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=14&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2000&LastYear=2011&3Place=N&Update=Update&JavaBox=no#Mid

* Real consumption growth hasn't dropped. It did the usual thing
during the great recession: it fell less than GDP did, then the
reverse on the rebound. I don't see how you can look at this and see
a collapse in consumer spending. See:

http://research.stlouisfed.org/fred2/graph/?g=19y

* Personal saving -- in some ways the opposite of spending -- has
risen, as many have noted, but it looks to me like an oddity: the
government’s saving has fallen enough to more than reverse this. To
put it more clearly, today’s low tax revenues show up as high personal
saving and low (negative) government saving. That’s not the kind of
thing we have in mind when we talk about saving going up, and it’s
likely to be temporary in any case.

* Household net worth (expressed as a ratio to GDP) shows at most a
modest uptick in the recent past, so the increase in personal saving
has yet to make a significant dent in household balance sheets:

http://pages.stern.nyu.edu/~dbackus/CA/ms/fact_fiction_figures.pdf

* Where Leonhardt is exactly right is on durable goods spending (cars,
appliances, furniture) and residential construction (new houses). See
lines 4 and 12 of the first link. Those are relatively small
components of GDP, but there’s no question they’ve gone down and
remain well below their pre-crisis levels. Housing I think we
understand -- we overdid it, and won’t need to add to the stock at the
same rate as before. Cars I don’t know. Are people driving less?
Driving older cars? Living in Manhattan, it’s hard to get a sense of
this, there still seem to be lots of yellow cars around.

Anyway, that’s food for thought. But if consumption isn’t the culprit
behind the discouraging job picture, what is? We’re now planted
firmly in the land of speculation, but here are a couple thoughts.

(i) Employment recovery has been slow coming out of every recession
since 1990-91. Has the world changed? Hard to say, it certainly
looks different from earlier periods. We also know from earlier
episodes that once recovery is well established, jobs will bounce back
as well.

(ii) There’s more than the usual amount of uncertainty right now, so
some firms may be waiting to see how things work out. We’d call it a
real option: hold off hiring till we know that the recovery is here
to stay.

Does that make sense or have I lost my mind? As I tell my students
and colleagues, it’s free advice, worth what you paid for it.

Leonhardt’s piece: http://www.nytimes.com/2011/07/17/sunday-review/17economic.html