It’s Consumer Spending, Stupid

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<p><a href=“http://www.nytimes.com/2011/10/26/opinion/its-consumer-spending-stupid.html?src=me&ref=general[/url]”>http://www.nytimes.com/2011/10/26/opinion/its-consumer-spending-stupid.html?src=me&ref=general&lt;/a&gt;&lt;/p&gt;

<p>I happen to agree with the gist of this editorial.</p>

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<p>And when both stop spending (consumers and gov’t) the recipe is a disaster.</p>

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<p>This guy is an idiot for two reasons. First, the definition of Gross Domestic Product is consumer spending plus business investment plus government spending plus net exports. Of course business investment affects economic growth because it is part of the definition of GDP.</p>

<p>Second, like most economists he assumes that economic growth means we are better off. It’s not true. GDP does not necessarily tell us whether there is wealth creation. For example, if government borrows 10 trillion dollars from future generations and spends it tomorrow, GDP goes off the chart. It looks like we are better off from government spending. In fact, there is no wealth being created. To the extent the government spending created GDP, the borrowing off set that growth when considered as part of wealth creation. </p>

<p>In short, government borrowing offsets the benefits of government spending.</p>

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<p>^ A good friend and I argue constantly about this. He argues that Americans are better off currently because “relative wealth is stable, being neither created nor destroyed, and prices are lower (so the wealth buys more stuff)”. He uses the example of gold in the ground in 1847. A lot of time and money were used to mine it, refine it, market it, transport it, and store it. According to his calculation the value of all that exceeded the value of the gold, the difference being made up in consumer/investor confidence (to embrace new, untested ventures … most of which fail).</p>

<p>Perhaps another way to examine this issue is to calculate how many careers were destroyed by the advent of personal computing.</p>

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<p>So…private sector borrowing offsets the benefits of private sector spending and investment?</p>

<p>So how should this be read?</p>

<p>[File:Components-of-total-US-debt.jpg</a> - Wikipedia, the free encyclopedia](<a href=“http://en.wikipedia.org/wiki/File:Components-of-total-US-debt.jpg]File:Components-of-total-US-debt.jpg”>File:Components-of-total-US-debt.jpg - Wikipedia)</p>

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<p>I am not sure what that chart shows other than that total debt began increasing dramatically after 1984.</p>