Should We Be Surprised?
The Retail Sales Slump
By DEAN BAKER
June 16, 2010
The Commerce Department reported that retail sales in May were down by 1.2 percent from April. This surprised most economists who had expected a modest increase. The media were filled with accounts of economists trying to explain why consumers were still reluctant to open up their wallets and spend in a big way. It would have been much more interesting to hear accounts of why economists were surprised.
To put it as simply as possible (so even an economist can understand it), the housing bubble was driving the economy in the period prior to its collapse, beginning in 2007. It drove the economy in two ways. The run up in house prices led to a building boom. Residential construction, which is typically less than 4.0 percent of GDP, rose to more than 6.0 percent, creating more than $300 billion in additional annual demand. A bubble in non-residential real estate added perhaps another $150 billion to annual demand.
The bubble also drove the economy through the effect of housing wealth on consumption. Economists usually estimate that $1 of additional housing wealth increases annual consumption by between 5 to 7 cents. This implies that the $8 trillion of housing bubble wealth would lead increase consumption by $400 billion to $560 billion a year.
Yet, we have dozens of economists being cited in newspapers and broadcast news, all saying that they are surprised by weak consumption. If anything the surprise should be that consumption is still as strong as it is. The saving rate is still near 4.0 percent, far below its historic average. Why on earth would any economist expect it to go still lower?
The reason that consumers are not spending more money has nothing to do with attitudes. The reason that most consumers aren’t spending is the same reason that homeless people aren't spending much money: They don’t have any money.
Economists used to be able to understand basic economic concepts. Apparently, most have lost this ability. As a result we are likely to see many more surprised economists and much proposed in the way of very bad economic policy.
Read the full article at:
http://www.counterpunch.org/baker06162010.htmlGuess I need to get a PHD in economics before I'll be able to understand that concept. So if people don't have any money to spend they don't spend it? mmmmmmmm Let me think about that for awhile! BBI
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