In “Mind the (spending) gap”. Atif Mian and Amir Sufi of Princeton and Chicago, respectively, are on the right track but go about it the wrong way and so arrive at a wrong conclusion. They wonder:
We all know that households cut back on spending dramatically during the Great Recession. Are they spending now? Has spending caught up to the trend the United States was on before?
The red line in the chart below plots retail spending in real terms in the United States from 1992 to 2013. We want to get a sense of the trend in spending so we plot spending on a logarithmic scale, and we subtract off the 1992 level to start the line at zero. A logarithmic scale is informative because a straight line in the chart would imply that spending was growing at a constant rate in real terms.
Why aren’t we getting back to trend? One answer often given is that the housing boom artificially boosted spending from 2002 to 2006, and so the trend we were on was an unrealistic benchmark that could not be sustained.
But the data contradict that story. There is no evidence that spending was above trend from 2002 to 2006. In the chart above, the red line doesn’t go above the black dots during the housing boom. Further, there is no evidence that the economy was overheating in terms of capacity from 2002 to 2006. House prices were booming, but other measures of inflation were steady.
Instead, the chart above may be evidence corroborating the worrisome “secular stagnation” view. The housing boom fueled household spending, but that spending only kept us on the same path we were on before – and it was done by enticing debtors to borrow and spend out of ephemeral housing wealth. When the housing boom disappeared, the permanent adjustment downward in the chart above suggests that we were already on a secular decline in household spending that the housing boom masked temporarily.
Why focus on one component of spending? Why do it in real (inflation adjusted) terms? What we should be interested in is in the total dollar amount of spending, i.e. NGDP, something closely influenced by the Fed´s monetary policy. As the chart shows, the overall story has the same pattern.
What the chart suggests is not that we were already in a secular decline in aggregate spending (not only household spending), but that the Fed allowed aggregate nominal spending (NGDP or AD) to tank. And aggregate spending has not caught up to trend for the very simple reason that the Fed has not allowed it to grow sufficiently to do so. And why not? Because it is terrified of any rise in inflation that might accompany it, even though inflation is still far below the Fed´s target!
The end result is that we are mired in a depression. That didn´t (and doesn´t) have to be so. And “suggesting” we were already in a secular decline which was “masked” is just “lazy-thinking” on the part of the honorable professors.