There is no bigger misconception held among the financial press and within academia than that of consumer spending. A typical example of this comes from a recent Reuters release entitled: “Strong Consumer Spending, Factory Data Buoy U.S. Growth Outlook.” The first sentence of the article reads, “U.S. consumer spending recorded its largest gain in more than 4½ years in March . . . reinforcing views the economy was regaining steam.”
The supposed importance of consumer spending as a gauge of economic well being is a modern notion ushered in during the Keynesian Revolution which took place in the 1930s. J.M. Keynes, a British economist, mistakenly believed that the Great Depression was the result of a “lack of aggregate demand.” Thus, demand had to be stimulated (mostly through government spending) to revive a moribund economy.
Keynes’ theory has, unfortunately, held sway ever since despite being contrary to what had been believed up until that time and the many of criticism of it since.
An individual’s income can be distributed in one of three ways: it can be spent, saved, or held in cash. If individuals do not spend and decide to save more of their income, it will have no negative economic impact. In fact, the increased savings will expand the capital base which will provide the vital means necessary for lengthier periods of production, a situation that will eventually generate more and cheaper goods – granted there is no artificial increase in the money supply.
If income is kept in cash (checking accounts, bills, coins, stuffed in mattresses), money is taken out of “circulation,” so to speak, which will eventually lead to an increase in the purchasing power of the monetary unit – a scenario rarely seen in the modern era, but one which would be of tremendous benefit to just about everyone especially retirees and those on fixed incomes.
The manner in which individuals divert their income, therefore, has little if any effect on output. Historically, this ratio has remained relatively stable with only gradual change over time.
Furthermore, consumption always takes place as long as there is life. One “consumes” without even walking out of the house – turning on lights, running water, eating, etc., – are all consumption activities. If there was a sudden drop off in purchases, it would not lead to a recession. Some retail sectors would likely suffer, however, it would only be for a short period until entrepreneurs adjust to the new saving and consumption patterns.
Instead of consumer spending, there are more accurate areas to “measure” economic performance.
First, the trend of overall prices: are prices falling or rising? If prices continually rise, it is the result of money creation (inflation) by the central bank – in America’s case, the Federal Reserve.
Second, the tax burden – what percentage of income is taken by the state? There are many pernicious effects of high taxes, the most damaging is that they sap an economy of the capital necessary for production and employment.
The personal savings rate is often overlooked as a barometer of economic well being. A low or negative rate of savings indicates, among other factors, that income levels are not sufficient enough for individuals to save. The individual savings rate in most Western nations is abysmally low and under current monetary and economic policies will remain so.
All three areas of Western economic life show negative trends: prices have continued to rise due to the central banks massive money creation to bail out, in part, the banking and financial sector. Taxes remain confiscatory and have not been cut in any meaningful way. And, the personal savings rate has hovered around zero.
Until the idea of consumer spending has been debunked as a meaningful index of economic conditions, the public will be continued to be misled by the actual state of market affairs. When more accurate indices of economic conditions are looked to, then the notion of what constitutes real prosperity and or economic recovery will have different connotations. Applying such indicators to current reality shows a stark and gloomy contrast to the rosy portrait of things that consumer spending enthusiasts so often espouse.
Antonius Aquinas 
Great job by Antonius! This type of content and analysis is so important for critical thinkers not brainwashed by the lame stream media and their willing accomplices in govt/academia. Love the perspective
Some of the things that you talk about are the same issues that us occupy wall street people protested about. I just think the banks are corrupt and we need to do something about it like maybe make them help us pay our student debt back. I wish you would write more about those issues for us young grads with allot of student debt and NO jobs. Keynesianism can work but it’s just not working now because of the republicans and big corporations are running everything. We need like real jobs but big business is too concerned about profit margins and stuff.
McCandless, your comment is unbelievable ignorant. Keynesianism doesn’t work. Pay your own student loans back. Not all banks are corrupt. Eliminate at least 50% of government, cut regulation, unleash the power of small business under a true system of free market capitalism, and job opportunities for your generation will abound. But no, you prefer big government to take care of you. You want to redistribute wealth by stealing from the productive class and giving to the non producers. And you want small business (the prime generator of employment) to be regulated out of existence. Well then, live with the consequences. The American dream stolen from you! Until you start thinking for yourself rather than puppet what some Leftist professor brainwashed you to believe, you will remain completely clueless of the real world.
Richard:
You are being kind! Comments like this remind me what we are up against – I am going to email Antonius and ask if his next topic might focus on student loans (debt!). That would make my wake.
Nick
Hey Richard and Nick, no wonder you guys like Antonius articles so much. All three can’t relate to student loan debt which has forced me to move back in with parents until I can get my feet back on the ground. I’m just saying as an in English major with a minor in events planning, I CANT find work and all the bail outs that your hero Bush forced through has made things really tough for Temple Grads. We bailed the bankers out, why can’t we bail out students like myself? I’m ready to work, but there aren’t any opportunities. Coming soon to a street corner will be me holding up a sign that reads; “Will work for a Student Bail Out”-Chris
Chris –
I don’t want to go “pile on city” but Chris lets stop lashing out indiscriminately – and please stop with the “Republicans are evil and I need a bailout”
Did you ever think that maybe your selection for a degree (English – and we have enough of those majors in society) might be the root of your problem – also “Event Planning” – what are you actually trained to do in a market economy? So lets say I decided not to major in accounting (which I did) and decided to major in Parks and Recreation (which I wanted to) – found out there wasn’t demand for that skill set – and started to ask for a government bailout? What ever happened to rugged individualism and personal responsibility?
Nick
Nick,
You must mean like the rugged individualism that TR(another republican thinking more about war then education) displayed in getting us in the phony baloney Spanish American War? BTW…I’m proud of my degree and will be one day teaching the classics to school kids! Sorry that doesn’t meet your “rugged individualism” criterion. Maybe I could bore them with a TR rough rider classic (yawn) or throw in a John Wayne classic like The Searchers and remind them how “rugged” that have to be to make in this world!-Chris