This lesson introduces the macroeconomic concept of Aggregate demand.
Spain's Economy Shows Fresh Strain – WSJ.com
Spain’s economy showed fresh strain as retail sales fell at a record pace in April, showing the government’s austerity program is strangling consumption and suggesting deepening recession. Data Tuesday from the National Statistics Institute, or INE, showed seasonally adjusted retail sales fell 9.8% on the year in April, compared with a 3.8% drop in March. The decline was the sharpest since INE started collecting the data in January 2004. Household spending is dropping as unemployment approaches 25% of the work force.
China’s growth model running out of steam – FT.com
For the first time in eight years, the Chinese government’s annual growth target has been lowered, to 7.5 per cent GDP growth for all of 2012…..
The new number represents Beijing’s recognition that the investment-driven, export-dependent growth model that has propelled it from an impoverished backwater to the world’s second-largest economy in just three decades is running out of steam……
The goal is to shift growth away from investment in polluting, energy-intensive, unsustainable industries and towards domestic consumption, particularly of services and “green goods”, such as energy-efficient vehicles and environmentally friendly building materials.
“We will move faster to set up a permanent mechanism for boosting consumption,” Wen Jiabao, the premier, said at the opening session of China’s rubber stamp parliament on Monday. “We will vigorously adjust income distribution, increase the incomes of low- and middle-income groups and enhance people’s ability to consume.”
via China’s growth model running out of steam – FT.com.
Comment:~ The trap China faces is that raising wages in order to promote domestic consumption will reduce competitiveness in export markets and harm its current export-driven growth model. Not only are exports likely to fall but, with a high propensity to save, there is no guarantee that Chinese consumption will rise as fast as wages.
Consumers May Be Spending More, but They’re Not Happy About It – Real Time Economics – WSJ
The percentage of Americans saying they were cutting back on their spending rose from 66% at the start of the year to 72% in September, where it has stayed for nine straight weeks. Spending, however, was up 5% in September from a year ago…..[it could be] that, more than two years into an anemic economic recovery, Americans are simply settling into a new routine, somewhere in between the forced austerity of the recession and the heady days that came before. Asked by Gallup whether they are watching their spending “very closely,” 88% of Americans said yes. That figure has hardly moved in two years.
via Consumers May Be Spending More, but They’re Not Happy About It – Real Time Economics – WSJ.
Basic definitions
I use basic economic terms quite frequently and it may be useful to set out their definitions:
- Consumption ~ is any purchase/sale that is not between entrepreneurs. That is, purchases from entrepreneurs by consumers.
- Savings ~ the excess of income over expenditure on consumption. Savings can include debt repayment and money lost or hidden in your mattress — they do not have to be deposited with a bank.
- Investment ~ an addition to the real capital stock of the economy. Alternatively, any purchase between entrepreneurs that is not part of user cost.
- Income ~ the value in excess of user cost which the producer obtains for the output he has sold.
- User cost ~ the measure of what has been sacrificed to produce finished output.
Keynes:
“Income is created by the value in excess of user cost which the producer obtains for the output he has sold; but the whole of this output must obviously have been sold either to a consumer or to another entrepreneur; and each entrepreneur’s current investment is equal to the excess of the equipment which he has purchased from other entrepreneurs over his own user cost. Hence, in the aggregate the excess of income over consumption, which we call saving, cannot differ from the addition to capital equipment which we call investment. Saving, in fact, is a mere residual.”
Richard Koo (The Holy Grail of Macro Economics) points out the flaw in this argument: when savers are forced to repay debt, savings no longer equal investment.
Steve Keen also highlights this:
“However when one thinks in truly dynamic terms, income is not all there is to aggregate demand. In a dynamic setting, aggregate demand is not merely equal to income, but to income plus the change in debt.”
U.S. Consumer Credit Fell $9.5 Billion in August, Biggest Drop in a Year – Bloomberg
Consumer credit in the U.S. unexpectedly dropped in August by the most in over a year. The $9.5 billion decrease followed an $11.9 billion increase the previous month, the Federal Reserve said today in Washington. Non-revolving credit, which includes student loans and financing for automobile purchases, slumped by the most in three years. Decreasing credit shows American households are either continuing to pay down debt or lack the confidence to boost spending on non-essential goods.
via U.S. Consumer Credit Fell $9.5 Billion in August, Biggest Drop in a Year – Bloomberg.
To Cure the Economy – Joseph E. Stiglitz – Project Syndicate
The economy was very sick before the crisis; the housing bubble merely papered over its weaknesses. Without bubble-supported consumption, there would have been a massive shortfall in aggregate demand. Instead, the personal saving rate plunged to 1%, and the bottom 80% of Americans were spending, every year, roughly 110% of their income. Even if the financial sector were fully repaired, and even if these profligate Americans hadn’t learned a lesson about the importance of saving, their consumption would be limited to 100% of their income. So anyone who talks about the consumer “coming back” – even after deleveraging – is living in a fantasy world.
via To Cure the Economy – Joseph E. Stiglitz – Project Syndicate.
One Number Says it All – Stephen S. Roach – Project Syndicate
The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US – and in the global economy.
……With retrenchment and balance-sheet repair only in its early stages, the zombie-like behavior of American consumers should persist. The 2.1% consumption growth trend realized during the anemic recovery of the past two years could well be indicative of what lies ahead for years to come.
via One Number Says it All – Stephen S. Roach – Project Syndicate.