Ever the iconoclast, Dean Baker over at the Center for Economic and Policy Research uses some data that shows consumers are on a tear right now, and that what’s really holding our economy back is our chronic trade deficit, much of which comes from our need to import hundreds of billions of dollars in petroleum.
On the arithmetic front, the piece comes up with a story where consumption of durables is $267 billion below the long-term average, while consumption of non-durables are $127 billion below their long-term average. While it has consumption of services somewhat about the long-term average, the next effect is that weak consumption is a big drag on the economy and accounts for a large share of the shortfall. It tells us:
“Consumers are holding onto their wallets — a continuing burden for the weak economy.”
Wow, that isn’t what the Commerce Department is telling my spreadsheet. I get that the average share of consumption (all categories together) in GDP was 67.3 percent in the years from 1985 to 2005. I get that it was 70.8 percent in the most recent quarter. This means that consumption was 3.5 percent higher than its longer period average as a share of GDP. This means that consumers are not hanging onto their wallets at all. In fact, they are spending at very ambitious rate. (Boys and girls, you can check this one for yourself by going to the National Income and Product Accounts and clicking up Table 1.1.5.)
This is consistent with the data showing that consumption is higher than normal relative to disposable income. (The adjusted consumption line has to do with the treatment of the statistical discrepancy in the national income accounts.) This means that consumption is not holding back the economy, it is actually unusually high.
Source: Bureau of Economic Analysis.
The amount of excess consumption is even more than this comparison suggests, since one reason that consumption is high relative to GDP is that tax revenue is low relative to GDP (i.e. we are running large budget deficits). If the deficit starts to come down, then disposable income will fall relative to GDP, which means that consumption will fall relative to GDP, even if the saving rate stays constant.
The other error along these lines is that imports should be expected to rise relative to GDP as the economy moves back toward its potential. If GDP were to rise by 6 percent to bring it back in line with its potential then imports would rise by roughly 20 percent as much or 1.2 percentage points of GDP. This would make it more clear that the biggest factor that is out of line with our historical experience is the trade deficit. That would be even more clear if we took a longer period as the basis of comparison that was not so distorted by asset bubbles.
Of course given the Washington Post’s unabashed celebration of recent trade agreements its reporters are probably not allowed to call attention to such facts.
Beezer here. I pass this article along because it might challenge our belief that household savings is the biggest drag on our economy. Can households be spending this much AND saving too? Or is the consumption figure really one of spending on petroleum, which is sucking money away from other productive enterprises? If that is the case, then a push to boost our own resource use could mitigate that drag a lot. Of course I would prefer we use sustainable energy rather than fossil energy, which imposes very expensive costs on society that never appear on those companies’ bottom lines because these costs happen after they’ve sold their product. Which means we pay the costs in other ways, to other vendors, like health care providers who make money treating chronic problems like asthma. Robert F. Kennedy gives a good explanation below as to why we might be a lot better off using alternative energy resources.