2011 July 25 Monday
Consumers Slashed Discretionary Services In Recession

New York Times economics writer David Leonhardt points to an interesting aspect of our current economic downturn: some categories of consumer spending have fallen to levels not seen for 10 to 20 years.

But the real culprit — or at least the main one — has been hiding in plain sight. We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making.

It is good that Leonhardt makes reference to the decades long unhealthy trend in debt accumulation that got us where we are today. The end of the private debt binge has drastically cut into consumer spending.

The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.

Decades of rising consumer debt, a huge housing bubble, and persistently high oil prices have made the current economic recovery the weakest since World War II. Steve Keen asks "Dude! Where's My Recovery?". Good question.

But what Leonhardt advocates as a policy response does nothing to address underlying causes.

A more promising approach could instead offer a tax cut to businesses — but only to those expanding their payrolls and, in the process, helping to solve the jobs crisis.

Tax cuts for expanding your payrolls? Seriously? Those businesses that happen to already have plans to expand their payrolls would get a tax break. The incentive would be too small to make a big difference. So the vast bulk of the benefits would go to hiring that would have happened anyway. How is this a cost effective use of the taxpayer dollars?

His next proposal is telling: He really doesn't know what to do about our economic predicament (just like me btw) but wants government to do something. For those on the political Left economic problems demand policy responses. They need government to be efficacious in managing the economy.

Leonhardt advocates for more research. Even if that'll help in the long run it'll have no impact in the next 3 years and probably little in the next 5 or 6 years.

Along similar lines, a budget deal could increase funding for medical research and clean energy by even more than President Obama has suggested.

How about some root causes? We have too much consumer debt and government debt. That's a root cause. How about more bankruptcies to discharge some of this debt? Then there's Peak Oil. Sorry, its drag on the economy is going to grow with or without better energy policies. Get used to declining living standards. Then there's another root cause in the labor market: America's declining competitiveness due to demographic changes causing skill levels to decline. Well, the horse is out of the barn and isn't coming back. Though with better immigration policies (e.g. skills-based requirements) we could slow the decline in labor quality.

We need policies that reflect the deep long term nature of our problems and no attempted tricks to jump-start our return to business as usual (BAU). Fact is, BAU ended years ago and it is not coming back. Only in 2008 did the financial markets run out of capacity to paper over the depths of our economic problem as rising debt ceased to be a viable way to hide America's decline in competitiveness.

The NY Fed says the decline in discretionary services spending has been especially severe.

The pronounced weakness in personal consumption expenditures (PCE) for services has been an unusual feature of the 2007-09 recession and the slow recovery from it. Even in 2010:Q4, when real PCE increased at a relatively robust 4.1 percent annual rate, real PCE on services rose at only a 1.4 percent rate. This weakness has been especially evident in “discretionary” services (to be defined below), which fell more in the recent recession than in previous recessions and since have rebounded more sluggishly.

...

The drop in discretionary services expenditures in the last recession was much more severe than in previous recessions: the nearly 7 percent fall from the peak is more than double the percentage decline in the early 1980s recession (the previous “champion” in this dimension).

Debt-burdened consumer, suffering higher rates of unemployment and underemployment and cuts in compensation, naturally have cut out optional expenditures. They have to husband their diminished resources in order to spend on essentials. They've got more cutting to do.

Share |      By Randall Parker at 2011 July 25 09:04 PM  Economics Limits To Growth


Comments
Lou Pagnucco said at July 26, 2011 10:07 AM:

Randall,

Doesn't the huge shift of income from the middle class to the financial sector and corporate officers deserve some mention?

Also, "American" corporations are hiring (in cheap labor markets) overseas while firing in the U.S.

Fortunately, though, this will self-correct as U.S. wages converge with those in underdeveloped countries.
The U.S. government is successfully implementing this wage-parity strategy.
Americans should look on the bright side - the glass is 1/10 full.

tacticalchrstn said at July 26, 2011 2:40 PM:

Instead of a short time (gimick) tax break it is time to discuss eliminating payroll taxes completely. Current FICA rates of 15.3% are killing employment. Profit is maximized when marginal revenue = marginal cost. Ad a 15.3% tax on all payroll and employment falls. Please spare me the lame BS about "employer payed" taxes. If I employ you and Uncle Sam demands fifty bucks a day as a consequence it does not matter if I give the fifty bucks to sammy or you do. What does matter is that your productivity better be greater than fifty bucks plus your days pay plus all other costs of employing you or you are fired. The other stupid arguement in favor of payrol taxes is that they are needed to fund SSI and Medicare. This is true, but sine accounting gimickry has resulted in payroll tax revenues being spent on other stuff instead of SSI for years the payroll taxes have been effectively divored from the programs they fund. Eliminate all payroll taxes now.

California kid said at July 26, 2011 3:57 PM:

I think it's also a function of the aging of the white boomers and browning of America by immigration. As people people age, they reduce their activities and hence their purchases. They sit and watch TV more often. The brown skinned immigrants, largely from Mexico, have interests that are less broad than the population they are replacing. How many 85 IQ Latino immigrants are interested in 8" Celestron telescopes to look at the Crab Nebula ? They're not going to be buying those telescopes.

Here's the problem. Due to previous generations of white men inventing labor-saving devices like the McCormick Reaper it doesn't take that many people to do the essential things that keep us alive. Maybe 10 or 20% of the population is all it takes ? So the rest of us must necessarily be employed at puff jobs. I mean... I am. Our company makes a little product for industry, but in the overall scheme of things, if we go out of business, life will still go on.

It's very easy for people to cut back on discretionary purchases and put millions out of work. And make them starve, too. So what is to be done ? Some sort of "national dividend" ? or call it welfare. That goes against the grain of everything I've been taught. You're supposed to work to live, not be a goof-off. Work builds character and all that.

I think this is one of the major problems of Western Civ after the industrial revolution. How to generate enough make-work jobs to keep everyone busy. Some of their solutions are pretty awful, such as endless war, blowing up somebody else's country to reduce teen unemployment. Or the problem might be self-correcting with nihilism building up and immigration and ultimately some sort of collapse and die-off.

Engineer-Poet said at July 26, 2011 4:22 PM:

We might want to look for people who cost more in social expenditures than they pay in taxes and pressure them to change their ways.  Illegal immigrants and even second and third-generation Mexican immigrants are considered citizens by other countries, and might be deported or paid to leave.  It might take surprisingly little money to remove a big fiscal drain.

Randall Parker said at July 26, 2011 8:41 PM:

Lou,

I've begun thinking about the financial sector and its slice of the economy. How big a problem is its parasitism? I think it a very important question. But I still find my understanding of it too limited.

I recommend an article I just read (that I'll probably turn into a post): Who Rules America? An Investment Manager Breaks Down the Economic Top 1%, Says 0.1% Controls Political and Legislative Process.

I'm interested in the financial sector now. Will have more to say about it in the future.

WJ said at July 27, 2011 12:10 AM:

41%. That's the share of corporate profits earned by the finance industry. In the 70s it was only about 15%. It hit 30% in the 90s. In the last decade it surpassed 40%. Under Democratic administrations and Republican ones, it's climbed.

Sorry if it's too late to dig up the citation.

Lou Pagnucco said at July 27, 2011 8:02 AM:

Thanks WJ,

Randall,

Alan Abelson rang the alarm about 8-10 years back in Barron's, where he showed graphs of a climbing financial sector GDP eclipsing the manufacturing sector's. Also the share of personal income going to paper-shuffling-asset-flipping-contract-managing Wall Street drones is much, much larger than decades ago. Their 2010 bonuses alone, amounted to 8% of all physical circulating cash. Each U.S. family is contributing $1000's/year to keep them in luxury, while they disassemble the U.S. economy and pick up commissions for shipping it overseas.

Lou Pagnucco said at July 28, 2011 10:44 AM:

Just published in Reuters - Another scheme Wall Street uses to syphon off Main Street money:

Special report: Goldman's new money machine: warehouses
http://www.reuters.com/article/2011/07/28/us-lme-warehousing-idUSTRE76R1O120110728

Goldman is using the approach that DeBeers uses (to create a diamond "shortage") to create an aluminum "shortage" by taking physical commodity out of the market -- Excerpt --

"The combination of the financing deals and the metal trapped in Detroit depots, means only a fraction of the inventories are available to the market.
Premiums for physical aluminum -- the amount paid above the LME's cash contract currently trading at $2,620 a tonne -- in the U.S. Midwest hit a record high of $210 a tonne in May, up about 50 percent from late last year. In Europe, the premium is at records above $200 a tonne, double the levels seen in January 2010.
The ripple effect into Asia has seen the premium paid in Japan increase 6 percent to $120 a tonne in the third quarter from the previous quarter, the first rise in nearly six quarters."

With the shroud of secrecy provided by trading in the "dark pool" markets, my guess is that the same thing is happening in the oil, agriculture and the other commodity markets.

I would also bet that the increased volatility and whipsawing of the equities markets is engineered to allow Wall Street and high-frequency trading firms to continually extract equity from exchange traded funds, mutual funds and retirement funds which must rebalance market exposure.

no i don't said at July 28, 2011 12:12 PM:

"We might want to look for people who cost more in social expenditures than they pay in taxes and pressure them to change their ways."

Well, I'm sorry, but those would not be Mexicans or any other nationality. In fact it would not be immigrants or children of immigrants. People who cost more in social expenditures than they pay in taxes are usually women with lots of children, beaten only by top politicians, religious ministers and Wall-Street pricks who really provide nothing and give nothing back to society.

Lyle said at July 30, 2011 4:11 AM:

Student loan interest rates are set when you graduate. My wife was lucky enough for them to be at 1.9% when she graduated 6 years back. Many of those graduating now are at 6.5% and have $100,000+ in student loans.

It is against the law to refinance student loans, and they can't be gotten rid of through bankruptcy. (Oh, and they are typically guaranteed by the government.)

So if you are wondering about the stagnation in consumer power - banks are taking 2-3% directly out of the salaries of the 20somethings graduating from college now ... you know, those people that have money and would otherwise be likely to buy products from local businesses.

My "stimulus" plan? Allow a marketplace for student loans. If suddenly the class of individuals most likely to spend were able to drop their compounded interest by 1-2% they would have astonishingly more buying power.

The only ones "hurt" by this plan would be the banks that would no longer have a high interest racket protected by the government. Yet I still believe they'd be making a killing even in an open marketplace - without hurting the economy as a whole.

Randall Parker said at July 30, 2011 10:55 AM:

Lyle,

My solution to the education cost problem: Automate and deliver education online. Education could cost a small fraction of what it does today.

Lou,

Well, they won't store that aluminum forever. When they sell it'll be a good time to put up an aluminum storage shed or buy some other aluminum-based product.

REN said at August 3, 2011 8:09 PM:

We have three deficits. The first one is deficit spend into our 80 military bases overseas. That money is used by the overseas country and is saved, or returned to the U.S. as TBills. The other deficit is due to the trade imbalance. For every POS good that comes in, a dollar must leave. Usually those dollars come bouncing back as a T Bill. The third deficit is the private economy due to our balance sheet recession.

The first deficit, military spending, allows foreign countries to save dollars. If they don’t have enough dollars on hand, then our big banks will do a currency raid, also called a bear raid. The Asian currency crises, the Ruble collapse, Mexican peso devaluations, Argentina, etc., were all bear raids. This is a form of economic warfare, where you are forced into saving dollars to protect your own currency. When the currency collapses, those who have extra dollars swoop in and buy up real assets on the cheap.

The second deficit, trade imbalance, is due to dollar as reserve currency. The other countries need to race to the bottom to acquire dollars to buy oil and to keep from being raided. This makes imports artificially cheap. The returning dollars that go into Tbills make our main street more expensive, as dollars are taken out of circulation (supply and demand).

The third deficit, in the private economy is due to the housing bubble. This was brought on because credit money needs the law to constrain it. The law was broken with Graham Leach Bliley busting out Glass Steagall.

REN said at August 3, 2011 8:46 PM:

We will continue to keep tariffs low because of our reserve currency status. The world needs dollars to consummate trade, and if they don't save dollars, then countries will get raided. This will continue the game of a race to the bottom to export to the U.S.

In the meantime, main-street continues to get hollowed out as the dollar is artificially driven higher. Other countries like China and Japan continue to take dollars out of circulation (buying Tbills), forcing the dollar higher. By not buying our output, they also hurt our real economy.

Since U.S. labor is driven high, and interest rates low (deficit spending plus the foreign buying of T Bills), then it is cheap for wall-street to finance the movement of U.S. industry abroad. This is labor arbitrage, where the Industrial captains slice of the delta in wages for themselves. They get to export back to the U.S. because tariffs must remain low (due to dollar as reserve status).

Meanwhile in the U.S., whole industries are stripped. This is refinancing businesses and putting said businesses into debt servitude. Extracting the wealth of the business for today at the expense of tomorrow, allows the dealmakers to walk away with the money, and also put the company into debt peonage. This short circuits the wealth mechanism, so factor workers output no longer bounces back to buy improved equipment and productivity. But, instead their output goes to service usury rents to the financier.

So, what is the fix for the great game? This is a great game where the financial community has co-opted our government. We are racing headlong toward Neo-Feudalism. The answer is getting rid of credit money. The money power is in private hands, and those private hands will serve themselves. Those private holders of the money power, like Geithner and Bernanke and their minions in the financial community, will lie to protect themselves, and obscure the truth every time.

House Bill HR6550 is by Kucinich, but it is also profoundly conservative, in that the bill returns money power back to the people. HR6550 gets rid of credit money and makes money lawful. The statist neo-feudal forces unleashed on the world will no longer have their roots watered with the productive output of our citizens. By denying them income, many of the perversions will come to a stop.

There are other solutions too, like a Tobin tax on computer trading, taxing the rent value of land, etc. But, the main cause is the credit money mechanism.


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