Posted by
Crescen7(Regis Matejcik) on Monday, October 12, 2009 11:34:23 AM
Once again, the experts abound. The pundits proliferate. The talking heads seem to parrot each other in virtual unison.
Consumer spending. Consumer spending. Consumer spending.
We're told that "consumer spending" accounts for 70% of our economy. That we are dependent on "consumer spending" for a full recovery to take place and to return to economic growth. The point of the message seems to be, "Gee, we've fixed everything wrong with the economy, but these stupid consumers don't have the good sense to go ahead and spend money." In other words, it's our fault the economy is not in recovery or perhaps even a booming expansion.
Such analysis is foolish.
In terms of economic expansion, consumer spending is a trailing rather than leading effect. It takes only a modest amount of reasoning to verify this fact. Before people spend money, they have to earn it. People earn money by producing something. It could be a tangible product, or a less tangible service; but in either event money is earned when something is produced. Such production adds value, or "wealth" to the economy. In return for creating such "wealth" people are compensated with money, which in turn they spend on whatever they happen to determine is in their best interest. Clearly, people may not engage in "spending" prior to "earning."
The concept of the "consumer driven economy"; could be analogous to the "tire driven car." It may be technically correct in both cases to say that "consumption drives the economy" or, "tires move the car." In truth, it is the "tire" that applies the force to the road that propels the car forward. Yet, when the engine doesn't start, or the gas tank is empty, it is strikingly pointless to expend much energy fretting about the condition of the tires when the car isn't running.
To continue with the analogy of the car; it is useful to consider Innovation/Production to be analogous to the "Engine/Transmission" of the economic growth. Consider for example the economic growth of the past quarter century. The innovations in the technology sector represent an economic advance that may exceed all the wealth previously created by man. As the last deep recession in this country drew to a close, (1980) there were no person
al computers or cell phones, just to name a few.
Advances in these technologies lead the way out of the recession of the 70's. When the economy sagged again in the early 90's there was no internet (to speak of) nor any web based businesses. Advances in internet technology propelled advances in computer technology and communications technologies in general. We all got email addresses, and cell phones. Eventually we wanted to merge the two and came up with "BlackBerry" type devices.
Now, before an innovation can actually work its way into the economy - it must be produced. Innovations in microprocessors, cell phones, and network technologies all required the production of countless materials and services in order to bring them to market. While much of the "hard manufacturing" of these items occurs outside the U.S. economy, one must remember that "production" of a good includes everything from concept to delivery. That includes advertising, shipping, retailing, and delivery - just to name a few. In truth, throughout most of the past 10 years, the U.S. economy functioned at very close to full employment. Had their not been large manufacturing resources in Asia and India, it is unlikely we could have achieved the capacity to produce the goods necessary to meet the demand. It required virtually all of the U.S. workforce to produce a portion of the goods sold here and to market, and distribute, and service the goods manufactured in other parts of the world.
"But if people don't spend - nothing gets produced !" Comes the lame retort.
Such reasoning is emblematic of the inverse logic of the economic illiteracy that identifies "consumption" as a driving economic force. Consumers make decisions to purchase goods or services because they believe that those goods or services will enhance their lives. For example, people buy cell phones to more efficiently communicate with others. In most cases people purchase cell phones because they believe the enhancement in their productivity will save them money, not cost them money. In most cases that is correct. Likewise, people purchased Ipods, and plasma screen TV's because they found them compelling experiences and likely to save them money on either recorded music, or perhaps trips to the theater or sports bar. What drove people to purchase those products was not some abstract notion of the economic climate, value of the dollar, or prevailing interest rates; it was the compelling nature of the innovative product that drove people to purchase these goods.
When such compelling goods are invented and produced, consumers will alter their economic decisions in order to obtain them. They might choose to work some additional overtime, take some money from savings, or use some of their available credit. In each of these cases, the economic decision has additional benefits to the economy. These are all aspects of an expanding economy. Clearly, however the expansion is driven by the innovation and production of desirable products, which in turn compel consumer spending.
When there is a lack of new innovative products to compel consumer spending, consumers will spend only to replace those goods which have become broken or worn out. This is a condition known as a "mature" industry. For example, the auto industry is a mature industry. People tend to purchase cars when the vehicle they own becomes increasingly less useful due to failing components and increasing costs of ownership. To a lesser extent, the same is becoming true for personal computers, cell phones and portable music players. Accordingly, there is a natural lag in the business cycle after a period of rapid innovation.
When there are not compelling innovations for which consumers to purchase; there is an increased propensity for consumers to save. Generally, the savings are based on the expectation that the money can be used in the future, either to replace a worn out item - or to purchase the latest compelling innovation. The savings are actually a vital part of the economic cycle, as the savings add to the asset position of lending institutions, and increase their propensity to lend. Such lending is often critical to the ability of innovators to bring products to market and producers to reach optimal production levels. Savings, in other words, are the precursor to investment, which is often the precursor to innovation and production.
In keeping with the car analogy, savings/investment could be considered the "fuel" of the economic vehicle. Our simplified economic vehicle metaphor works like this; the fuel of investment, feeds the engine of innovation, which provides power to the transmission of production, which turns the tires of consumption. And so the economy rolls.
Any objective analysis of the vehicle of the economy would conclude that our tires are fine and we've got sufficient fuel in the tank. That is, there's very little resistance to consumption in the country, and we've spent trillions to make reasonably sure that there is a functioning banking/savings/investment system. Yet, public policy seems obsessed with the idea of trying to put more "gas in the tank" and "get better tires"; while concurrently smashing a virtual sledge hammer of regulation, legislation, taxation, and litigation, into the engine and transmission of the economy. Now, after decades of hammering away at the engine of our economy, public policy makers openly wonder, "Why won't this damn thing run?"