Civitas Review

Consumer Spending Not the Problem During Recession

4
Sep
14

The indispensable economist Robert Higgs updates us on an ongoing theme I have discussed here a number of times in the past: the myth that it is consumer spending that drives economic growth and recession. Dips in consumer spending are the result of, not the cause of, a growing or slumping economy. Higgs presents the data to back up this claim:

According to these data, real personal consumption expenditure recovered from its recession decline by the fourth quarter of 2010. Continuing to grow, it now stands (as of the most recent data, for the second quarter of 2011) even farther above its pre-recession peak.

Real government expenditure for consumption and investment (this concept does not include the government’s transfer spending, such as unemployment insurance benefits and social security benefits) is also running higher than its pre-recession level. In the second quarter of 2011, it was running more than 2 percent higher (recall that this is “real,” or inflation-adjusted spending; nominal spending has grown substantially more).

The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak. This figure fails to show how bad the investment situation really is, however, because the bulk of the investment spending now taking place is for what the accountants call the ”capital consumption allowance,” the amount estimated as necessary to compensate for the wear and tear and obsolescence of the existing capital stock.

The key variable is net private domestic fixed investment—the investment that builds the productive private capital stock. Quarterly data through this year are not currently available at the BEA website, but the annual data show that an index of its real amount peaked in 2006, fell substantially in each of the following three years, and recovered only slightly in 2010, when the index showed net private domestic fixed investment was running about 78 percent below its level in 2005 and 2006. Here is the true reason for the recession’s persistence.

Higgs (rightly, I believe) places a large share of the blame on entrepreneurs' reluctance to invest in capital goods on "regime uncertainty," or an unpredictable policy climate in which businesses are unsure of the impact of Obamacare, Wall St. regulation reforms, stimulus spending and the Fed's money printing (among others).

It's important to understand the true cause of the recession so we can avoid policies designed with the faulty premise of "getting consumers spendng again."

One Comment on this post

  • mtn girl says:
    Sep 14 at 17:21

    Our free market has never been more free. What is different in these times is the fact that the majority of Conservatives in govt. and business have stopped caring about middle class workers. When the disparity between income is as great as it is now -we can only fail and when we do- the blame needs to be placed where it belongs-at the feet of the Republican party.

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