September 30, 2010

Final 2Q10 GDP: Annualized +1.7%; Debunking the ‘Consumer Spending Drives the Economy’ Myth

The BEA’s full release is here. Expectations were for no change from August’s estimate of an annualized +1.6%.

Immediate (but clearly planned) AP reax from Jeannine Aversa (bolds are mine):

Many think the economy grew at around the same anemic pace, or slightly worse, during the July-to-September quarter. Little improvement is expected in the final quarter of this year. That’s why unemployment – now at 9.6 percent – is expected to stay high or even rise in the coming months.

Americans just aren’t spending at a robust pace to bulk up companies’ sales and make them confident enough to beef up hiring. Consumers and businesses, battered by the worst recession since the 1930s, are clinging to their cautious ways.

Consumers, in particular, are paring down debt, aren’t spending as much as they normally do during an economic recovery and they are saving more. Their spending accounts for roughly 70 percent of economic activity, so their frugal behavior explains why the economy is stuck in a slow-growth rut.

So the problem is that we dummies just aren’t spending enough.


An e-mailer has pointed me to a great article addressing foolishness such as what Aversa has written above.

First, a fundamental economic truth: GDP isn’t spending of dollars; it’s production of goods and services. The government measures GDP by referencing spending as an indirect way to get at (really back into) production. Alternative methods of measurement are either too difficult, too imprecise, or take too long.

Which takes me to the e-mailer’s article. It’s a Monday National Review item (“70 Percent: The Myth of the Consumer Economy”) by Kevin D. Williamson. Behold the wisdom, and the clarity (bolds are mine; internal links are in original):

God defend us from man of one datum, particularly if that man is an economist, and particularly if the datum is wrong.

Exhibit A is the constantly repeated but entirely untrue statement that consumer spending represents 70 percent of the U.S. economy, and that it is therefore imperative that we give consumers some stimulus, in the form of tax rebates, more generous unemployment checks, or cocaine-monkey research grants, in order to put some schmundo in Joe Consumer’s hip pocket, the better for him to carry that seven-tenths of the economy he allegedly holds upon his shoulders like some debt-ridden Atlas chained to Mount Wal-Mart, his liver pecked by a winged and deathless Visa bill.

Who is guilty of repeating this?

(after naming several others–Ed.) Reuters repeats this canard. Martin Crutsinger, the clueless economy reporter for the Associated Press, publishes it all the time. Fareed Zakaria and Pauly K. sing from this hymnal. Practically everybody saying the stimulus should have been bigger (and, for those of you outside New York and Washington: yes, such creatures walk among us) cites that datum.

It is not true.

As Michael Mandel documents copiously in his Bloomberg Businessweek column, what government statistics call “consumer spending” is not — get this! — consumer spending. Most of it isn’t, anyway. (actually, by Williamson’s math, it’s about 57%, or 40% below divided by 70%, but that really doesn’t detract from his point. — Ed.) Lots of that so-called consumer spending is in fact government spending; Medicare and Medicaid, for instance, are lumped in there, as is most health-care spending, which amounts to, oh, $2 trillion a year, which might tend to throw the consumer-spending numbers off a bit. Health-care spending isn’t really driven by consumers (which is why our health-care market is so messed up, incidentally!), but by insurance companies, government, and other non-consumer enterprises. Something on the order of 15 percent of health-care spending actually comes out of consumers’ pockets. Chickenfeed, in the vulgate.

All sorts of other stuff is dumped into that category: the money spent by nonprofits, for instance, along with political parties and campaigns. … the truth is that consumer spending, in reality, represents less than half of U.S. economic activity, probably around 40 percent.

Whatever fraction of our economy is represented by household consumption, 100 percent of our economy — and every economy — is represented by production. We cannot consume that which has not been produced.

The problem of economic policy is not getting people to consume. It is getting them to produce.

… the ultimate in magical thinking (is saying that): We’ll just borrow another few trillion dollars and consume our way out of what ails us! You want fries with that?

I’ve got some bad news for you, Sunshine, some ancient and unalterable and inescapable bad news: As ye sow, so shall ye reap. We’re presently sowing jack, and the Obama administration, the Pelosi-Reid Congress, the Krugmans and Reichs of the world are working hard to make sure that we sow even less. Real prosperity only comes from real productivity, which means real savings and real investment. Everything else is a Beltway full-employment program for social engineers, unicorn wranglers, and fairie-dust sprinklers.

So how do you get people to produce more?

Let people keep more of the fruits of their labor and investment, and they’ll work and invest more. People who haven’t been working will enter the workforce. Businesses will reinvest increased profits in growing their enterprises, or will save more, thereby making more capital available to others. That’s why tax policy is so important.

Along these lines but a bit off the beaten path of current debate, I think I had a pretty interesting idea towards the end of this post earlier this morning. My non-objective assessment is that it’s worth a look-see.



  1. Consumers, in particular, are paring down debt,

    This is also a false statement and promoted myth. In fact, most of the that debt has been DEFAULTED upon. It’s not that people are necessarily spending less, it’s that they AREN’T PAYING for what they bought. It’s an environment that liberals love, you know it by the phrase, Redistribution of Wealth.

    Comment by dscott — September 30, 2010 @ 10:01 am

  2. Great point.

    So many distortions, so little time.

    Comment by TBlumer — September 30, 2010 @ 12:05 pm

  3. What’s astonishing is that all of this is just basic economic knowledge, it’s not rocket science. So why do libs push fundamental errors like the “consumer spending” myth and the like?

    For example, can we really call Krugman at NYT a economist when his Keynesian outlook is so basically and obviously wrong?

    Comment by zf — September 30, 2010 @ 8:26 pm

  4. #3, because we don’t mock them enough for prattling stupidity.

    Comment by dscott — October 1, 2010 @ 9:35 am

  5. [...] As discussed last week, any time someone describes the lack of consumer spending as a primary impediment to economic growth, they’re proving that they totally don’t understand where economic growth comes from. [...]

    Pingback by BizzyBlog — October 7, 2010 @ 8:53 am

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