Increased Consumer Spending Does Not Make Us Better Off

Contrary to popular belief, increases in aggregate spending (e.g. consumer spending) is not what leads us to a higher standard of living. Nevertheless, both in good times and bad, consumer spending is the gauge the media focuses on as a barometer of how we're doing; but consumer spending is only a measure of short-term demand. Increases in standard of living, however, come from our ability to do our jobs more efficiently.

For example, consider a plant that employs 1000 workers and makes one widget per day. Suppose one day the plant manager comes up with a new method of making that widget, and only requires 500 workers to do it. The remaining workers just got richer, because now the revenue from the widgets sold is spread over fewer workers. (In practice, of course, this process would take time, and the higher profits would be shared among owners and laborers through market forces. Furthermore, the 500 laid off workers would undergo short-term difficulties until they could join a company that's expanding.)

The aggregate nation-wide level of these efficiency improvements is referred to as productivity growth. Here's a look at U.S. productivity growth (in percent) over the last 60 years: (Click to enlarge)

Productivity numbers are reported every quarter, but are not given the attention they deserve. Government policy should be geared towards encouraging productivity gains, which come from savings which leads to investment. Instead, governments often focus on increasing consumer spending, which causes short-term pick-ups in demand (and therefore increases GDP and reduces unemployment in the short-term), but makes us no better off in the long-run.

Comments

[TradingHelp...:]

If the increase in consumer spending comes from increased earnings then it is positive.

If it comes from debt then at best it is just borrowing from future earnings and creates inflation.

That is why we still have deflationary pressures. The economy is paying for a decade of low savings, and consumer spending at inflated levels due to borrowing. It will take at least 5 years for consumers to rebuild their balance sheets and let's not forget 9.8% unemployment.

Excellent piece on ongoing deflationary pressures here:

www.elliottwave.com/r....

Nov 04 04:52 AM

[themang:]

If productivity makes our std of living better, then how come real wages have stagnated for median household incomes over the last 30 yrs? From this argument, I would expect real wages to increase across the board. 30 yrs ago the avg ceo made only 10x the median wage but today that CEO makes nearly 200X the median wage. From the graph we had significant increases in productivity, however the productivity earnings that the avg person should have received was dare I say the word "redistributed" from his/her pocket to the rich.

Consequently, when that CEO sits on that money or hides it in some offshore bank, consumption reduces. Further, when consumption reduces how will businesses have money to improve operational productivity? In essence, we have a paradox of production as it relates to consumer spending. It seems that this hypothesis needs tweaking for reality.

Nov 04 01:01 PM