Posts Tagged ‘consumption’

Consumption — What a difference a month makes

29 August 2011

Today’s big news is an unexpected surge in consumer spending in July. After adjusting for inflation, the increase is 0.5%, which is the largest since 2009. It comes after three straight months of decreases in real consumer spending and a historically dismal reading for consumer confidence a few weeks ago.


Granted, the recent plunge in consumer confidence could translate into an immediate about-face in consumer spending, but for now the picture looks quite different. Much of the collapse in confidence was due to the debt-ceiling fiasco and dashed hopes for a budget deal, but memories of that episode may fade, at least as far as their impact on consumer behavior; after all, Congressional dysfunction is nothing new.

The July increases for personal income (0.3%) and consumption (0.8%) pull the year-to-year monthly increases up to 5.3% and 5.1% (in nominal terms). Subtracting the 2.8% inflation over the same period, the real increases are 2.5% and 2.3%.(Source: Bloomberg.com; sorry, no Permalink available.) Still not enough to lead a rapid recovery, as 3% real GDP growth is the norm and at least 4% would be needed to reduce unemployment, but not bad. Dean Baker has noted that consumption is actually fairly high, in the sense that the household savings rate is low by postwar standards. So it appears that consumers are spending, they just don’t have a lot of income to spend.

Don’t look to us

12 August 2011

Households, that is.

Household consumption has long been the mainstay of U.S. GDP, and asset-bubble-driven consumption in turn helped drive the expansions of the 1990s and 2000s. But consumption spending has been weak in this so-called recovery, growing at only about 2% (annualized and inflation-adjusted) since its trough in spring 2009, and it fell in each of the last three months for which we have data (see graph). On top of that, today’s consumer sentiment numbers are the worst in three decades. To find worse, you’d have to go back to a month that included recession, double-digit inflation, Americans held hostage in Iran, long gas lines, and the eruption of Mount St. Helen’s (this is starting to sound like a pub trivia quiz . . . the answer is May 1980).

(Graph from www.data360.org.)

File under “Outraged and paying attention”: From the press release accompanying the consumer sentiment survey data (from Thomson Reuters / University of Michigan):

‘”Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role,” survey director Richard Curtin said in a statement.

‘The Obama administration received poor ratings from 61 percent of respondents, the worst showing among all prior heads of state. [I could not find a rating for Congress, but in recent polls Congress gets even lower ratings than Obama.]

‘”This was more than the simple recognition that traditional monetary and fiscal policy measures were largely spent; it was the realization that the government was unable or unwilling to act,” Curtin added.’

Yes. Imagine if the government had spent this year looking for ways to stimulate the economy rather than contract it through spending cuts. Failing that, imagine if if Obama had forcefully and publicly told the Republicans that it was absolutely unacceptable for them to hold the debt ceiling hostage to their root-canal economics. (It worked for Bill Clinton in 1995-96 with the government shutdown.) At least one branch of government would be seen as more focused on jobs than deficits.

Instead, as Curtin implies, the public rationally concludes that jobs take a back seat to deficit cutting on all major politicians’ agendas. And the attention given to the debt-ceiling debacle has much of the public expecting more of the same in connection with the budget appropriations deadline on Sept. 30, the deadline for the Group of Twelve’s long-term budget-cutting proposal on Nov. 23,  and the expiration of the Bush tax cuts on Jan. 1, 2012. It’s easy to imagine the entire rest of the year devoted to partisan trench warfare, isn’t it? Be glad these guys are on vacation.

P.S. Title inspired by The Clash, of course. Alas, poor London. Feels weird to read about traditional looting for a change instead of the financial variant.

The Other 2%

15 August 2010

One of the big issues before Congress right now is whether and how to extend the Bush tax cuts, enacted in 2001 and scheduled to expire at the end of this year.  Congressional Republicans want to make them permanent.  President Obama and many Democrats want to extend the Bush tax cuts for everyone except the very wealthy, i.e., those in the top tax bracket (which would go from 35% back to 39.6%, where it was in 2001).

Throughout this debate I had agreed with the Democratic position, for reasons of both equity and economics.  Over the past thirty years, incomes and wealth in this country have become much more skewed in favor of the rich, so as long as we have a progressive tax system why not use it to push back against that trend?  (I’m not saying let’s equalize incomes, just that trying to check the increase in inequality is a reasonable thing to do.) Only about 2-3% of households — those earning over $373,651 —  are in the top tax bracket, and even then their first $373,651 of income would be taxed at the same rate as before, so the pain associated with raising the top tax rate seems small.  On the economic side, cutting taxes for the wealthy provides a smaller boost to consumer spending than just about any other tax cut or benefit increase you can think of.  See, for example, the “stimulus bang for the buck” table on page 5 of this testimony by Mark Zandi, Chief Economist of Moody’s Analytics back in April.  In the case of making the Bush tax cuts permanent, a dollar of tax cuts would raise GDP by 32 cents, compared with, say $1.41 from an increase in aid to state and local governments or $1.61 for an extension of unemployment benefits.  (The logic is that wealthy taxpayers save much of their income, so small differences in their after-tax income won’t affect their spending much, at least not compared with other taxpayers.  And increases in government spending increase GDP directly and can, if the government starts jobs programs, employ people directly.) And then there are the tax revenues to consider — those top 2-3% of taxpayers have a huge amount of taxable income, so a 4.6% difference in that top tax rate makes a big difference in the government’s deficit and debt.

But equity and economics are unlikely to carry the day in Washington, D.C.  Today’s New York Times has a remarkable op-ed by the same Mark Zandi, titled “A Tax Cut We Can Afford,” in which he argues for extending the Bush tax cuts, sort of.  He says they should be extended for the wealthy, too. His reasoning is political:  Yes, it would be ideal to let the top rate go back to 39.6% and use the new revenue to pay for jobs programs or bigger jobs tax credits, but that option is not on the table.  Republicans and conservative Democrats would undoubtedly block it.  Another truly sizable spending stimulus is not on the table either.  What is feasible, besides minor measures like the jobs bill passed this month, is . . . extending the Bush tax cuts.

Although extending tax cuts on those making $374,000+ a year is not a great option, Zandi says, raising their taxes and (with effective stimuli off the table) doing nothing with it is a worse option.  Most of U.S. GDP is people’s consumption, and even though the rich consume less of their income than other people do, they still consume a lot, so much that their consumption may determine the fate of GDP over the next few years.  The Times recently reported that rich Americans have cut back on their spending.  The article quotes Zandi yet again: “One of the reasons that the recovery has lost momentum is that high-end consumers have become more jittery and more cautious.”  The top 5% of Americans account for one-third of consumer expenditures, according to the piece.

Generally speaking, you don’t raise taxes in a recession.  That’s one of the endlessly repeated lessons of the Great Depression (Hoover and Congress raised taxes in 1932, Roosevelt and Congress did so in 1936), and it still applies.  Again, if you could raise upper-income taxes and use them to pay for well-targeted stimulus programs, that would be fine, but to quote Zandi again, “it is asking too much of our political system now to get it just right. I’m skeptical that a politicized Congress would be able to pull it off, and failure to do so would leave us next year with higher taxes and a hobbled recovery.”

Zandi says the tax-cut extension for wealthy households should be temporary, to be removed when “the economy is off and running,” with the increase phased in perhaps over a three-year period.

I am pretty well convinced.  I’ve been arguing in this space that the severe slump we’re in makes this a terrible time for drastic spending cuts.  By the same token, this is not a good time to raise taxes on anyone.