JW Mason — The Nonexistent Rise in Household Consumption

Unless you've already read Household Income, Demand, and Saving: Deriving Macro Data with Micro Data Concepts by Barry Z. Cynamon . Federal Reserve Bank of Saint Louis, and Steven M. Fazzari, Washington University in St. Louis, you should probably read this whole post.

Most people don't realize how much of what goes into the headline measures of household income and household consumption does not actually correspond to any flow of money to or from households. In 2011 (the last year covered by the paper), personal consumption expenditure was given as just over $10 trillion. But of that, only about $7.5 trillion was money spent by households on goods and services....

... if we limit "consumption" to purchases by households, the long term rise in household consumption -- taken for granted by nearly everyone, heterodox or mainstream -- disappears....

By the official measure, personal consumption has risen from around 60 percent of GDP in the 1950s, 60s and 70s, to close to 70 percent today. While there are great differences in stories about why this increase has taken place, almost everyone takes for granted that it has. But if you look at Cynamon and Fazzari's measure, which reflects only market purchases by households themselves, there is no such trend. Consumption declines steadily from 55 percent of GDP in 1950 to around 47 percent today

The takeaway points:

 There's a common trope in left and heterodox circles that macroeconomic developments in recent decades have been shaped by "financialization." In particular, it's often argued that the development of new financial markets and instruments for consumer credit has allowed households to choose higher levels of consumption relative to income than they otherwise would. This is not true. Rising debt over the past 30 years is entirely a matter of disinflation and higher interest rates; there has been no long run increase in borrowing. Meanwhile, rising consumption really consists of increased non-market activity -- direct provision of housing services through owner-occupied housing, and public provision of health services. This is if anything a kind of anti-financialization.

The Fazzari and Cynamon paper has radical implications, despite its moderate tone. It's the best kind of amcroeconomics [sic]. No models. No econometrics. Just read the damn tables, and think about what the numbers mean.

The Slack Wire
The Nonexistent Rise in Household Consumption
JW Mason | Assistant Professor of Economics at Roosevelt University