Tuesday, September 23, 2014

Consumption Be Done About It?

The US has always depended
On a rate of consumption that's splendid,
By consumers for whom
The means to consume 
May soon have them overextended. 

It's best if our various strata
Could recover their income pro rata
To grow GDP,
But as you can see,
It isn't borne out by the data.  

If there's anything that we have learned,
It's consumption that cannot be earned 
Will grow if we let it 
Be funded by credit,
A fact that should have us concerned. 

One may imagine that "the 1%" do not care about stagnating prospects of the other 99, but the Journal's Pedro da Costa has found a notable exception.  In his Real-Time Economics blog post, da Costa says that Wall Street Cares About Inequality. Of course, it's because the U.S. economy depends heavily on the rising tide of consumption to lift all the boats. If an economic recovery does not feature broadly shared rising personal income, then there is no sound basis for greater personal spending. 

Unfortunately, the data show that this sound basis is precisely lacking.  As depicted in the accompanying chart, wages for the average worker (a non-management employee in the private sector), which fell in the recession, have not quite gotten back up. 

In a report entitled “Inequality and Consumption," Morgan Stanley economists Ellen Zentner and Paula Campbell note: “It has taken more than five years for U.S. households to ‘feel’ like they are in recovery. Before the recession, the expansion of credit simply delayed the day of reckoning from declining incomes and rising inequality.”

The economists go on to say that stronger wage growth would lift spending across the economic spectrum, and the lack of such a broad-based recovery means the Fed will continue its easy-money policies for the foreseeable future.  But, is monetary stimulus the best we can do? 

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