Is Economic Analysis Based on the Real World Yet, or Are We Still Just Fudging it?

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Related subjects: In the Loop, J.E. Robertson, Media, Mortgage & Credit Crisis, Opinion, U.S. Economy Comments (1)

25 August 2008 :: J.E. Robertson

ANALYSIS OF CONSUMER SPENDING SEEMS NOT TO ACCOUNT FOR CONSUMERS’ REAL ECONOMIC CONDITION

As the US economy goes through one major shock after another —in jobs, stocks, housing, banking, general inflation, food prices and energy—, with economists saying this is the worst economic trauma since the Great Depression and the “dustbowl” of the 1930s, we are still hearing debate about whether we are in recession and whether or not consumer confidence is dropping off for material or psychological reasons. It just might be that the perspective of the average consumer is determined by actual spending ability.

The most important question about media analysis seems to be: why are the mass media so afraid of nuance? Wouldn’t that make analysis and comment all the more useful, all the more reliable and attractive as a viewing item? Do they really think that most people eagerly tune in to see talking heads bandy about the narrowest, least complex viewpoints, as if they were providing information we cannot glean from common sense?

There is of course the theory that media reporting drives public opinion, and that if consumer confidence can be upwardly affected by positive analysis, then economic and financial analysts —be they of the public or private sectors— have a good reason to pitch the positive in their analysis. Tell people they are confused about whether they should spend or not, and they will likely feel more “confident” and begin spending.

The problem is: this logic has literally nothing to do with how “consumers” think. Investors think this way. People who put large sums of money into the stock market, commodities and other tradable investments, may hold back when they see that their investment may be limited in long-term growth by the facts of an economic downturn. But consumers spend what they can, when they want to. Consumption is generally not investment; people don’t go on vacation as an investment, they go because they can, and they don’t expect any ROI from having gone.

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If we consider what “consumer confidence” really means —even taking into account home-buying and car-buying, both of which generally include the complications of bank loans—, we find that it is unlikey, from a purely logical standpoint, that “consumers” are unwilling to spend simply from psychological confusion. The fact is, real wages in the United States have actually declined, since the year 2000, while the cost of living has steadily risen and “economic expansion” generally has led economists to believe that everyone should be doing better than before.

The New York Times Magazine this weekend reported that “The international Monetary Fund has described the situation as ‘the largest financial shock since the Great Depression’”, adding that “For the first time on record, an economic expansion seems to have ended without family income having risen substantially. Most families are still making less, after accounting for inflation, than they were in 2000.”

Those families account for “roughly the bottom 60 percent of the income ladder”, and the facts of their economic situation mean they are in fact unable to spend at an ever-increasing rate. Taking into account what have been truly astronomical levels of inflation in the cost of healthcare, food and fuel, the real spending power of 60 percent of the American workforce has been radically reduced.

This has led to heated debate among economists about whether the true American middle class really survives in the present climate. For debate among economic and financial analysts, using only GDP as a measure of economic growth —meant to read as “improved economic condition”—, to center on the frame of mind of consumers and not the factual economic condition of the majority of American consumers, is to ignore the basic problem: that those who drive the economy are simply less able to participate in a diverse or self-motivated way.

If we are an economy based on self-reliance, individual choice and market dynamics, should we not consider that if the overall wealth of the majority decreases, we are in the process building severe weaknesses into our long-term economic outlook? How does this sort of reality fit into soundbite television analysis? It could sound something like: “Most Americans are simply not able to spend as much, due to lagging income levels, layoffs, credit problems and banking mis-steps.”

If that’s too complicated, it could be shortened to “Most people have less money to spend, so they spend less.” Now, market dynamics are in fact a major part of the vibrant American economy, and they are part of its slowdowns as well. ‘Consumers’ are not people with a lack of commitment to national economic growth; they are people who spend money. If they give less of it to industries that rely on consumer spending, then the fund for consumer spending —individual wealth— is what we need to address.

Perhaps the most shocking aspect of this problem is the issue of probability, and by extension of probability ignored: if consumer spending drops, would it not be —of all the possible alternative explanations, real or imagined— the most probable that the cause is a decrease in the fund that backs consumer spending may be tight, or in decline? Especially if we are thoughtful enough to distinguish between the motivations of investors and those of consumers.

Again, the failure of the mass message to address the basic problem is itself indicative of other problems: for one, the quality of information available would appear to be inferior, based on this flaw; but also, it is worth considering that such distracted economic commentary serves to conceal real dangers in the overall economic outlook. If we do not know that most workers’ incomes are now lower in real terms, then we will not plan for the fallout that will inevitable result.

And, if we are not aware of reduced income levels in planning to soften the blow of a complex national economic shock, then we may misjudge our response to a number of economic problems. The mounting mortgage, credit and banking crisis hinges not only on people’s credit ratings, but on their ability to earn increasing amounts of money to cover an increasingly expensive American consumer lifestyle.

If individual wealth is hit hard by the banking crisis, and still less money is available through credit, the problem of consumer spending levels will persist, beyond the overall economic downturn, risking a period of stagnation. Japan’s economy has been crippled for nearly two decades in part by this sort of problem, and we have clear evidence that the American economy is facing a consumer-based economic crisis that may far outstrip the perils of volatility in financial and commodities markets or the unraveling of the status quo in the banking sector.

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