“Whither Spending?”

David Andolfatto has a post “Whither the consumer?” His important chart is a version of this one:

Whither Spending_1

He comments:

So, residential investment behaves largely like other forms of investment, except that it is considerably more volatile. In particular, the recovery dynamic for residential investment looks like what one might expect, given the large negative shock in that sector. And yet consumer spending continues to fall away from its historical trend, even as residential investment recovers (albeit, slowly).

And asks:

Can someone point me to a theoretical model that generates this type of consumption-investment dynamic during a recovery?

I would suggest he take a closer look at his first chart, a version of which below:

Whither Spending_2

Looking at the period after 2007, we may see where this unfamiliar consumption-investment dynamic is coming from. Real output has dropped relative to trend by an order of magnitude greater than at any other time and, apparently, refuses to regain its former ‘status’.

Wouldn´t that be the natural outcome of a driving process – nominal spending (NGDP) – that remains depressed?

Whither Spending_3The “theoretical model” that generates this type of consumption investment dynamic goes by the name of “very bad monetary policy” i.e., one that forgets that good results come from securing nominal stability!

4 thoughts on ““Whither Spending?”

  1. Steve Sailer pointed out that the view that Economists and Social Scientists are worthless is biased by the non-overlap between questions people are currently interested in and questions social sciences can answer. Example: He defended Milton Friedman by pointing out that Friedman was the loudest critic of Nixon’s somewhat widely supported Price Controls. Friedman was right and people forget that the efficacy of Price Controls was once a contentious issue and therefore underappreciate Friedman in particular, economics in general. The issue of Price Controls was RETIRED from general discourse.

    Your response to Andolfatto’s request for a ‘theoretical model’- “it’s the NGDP stupid”- reminded me of Sailer’s point. If you guys are right about Macro, you guys basically RETIRE the entire field of Macro!

    Imagine how useless Econ will seem 40 years from now with NGDPLT adopted, effective, it’s wisdom “obvious” to all and it’s once-contentiousness forgotten!

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