Are Government And Business, Not The Consumer, The Real Drivers Of The U.S. Economy?

by: Steven Hansen

Summary

We have been conditioned to think of the USA economy as consumer driven as it reflects the way GDP is presented.

GDP is presented to show who spends the money last.

Would it not be as logical (or even more logical) to envision the economy as which elements spend the money first?

According to Wikipedia:

A consumer economy describes an economy driven by consumer spending as a percent of its gross domestic product, as opposed to the other major components of GDP (gross private domestic investment, government spending, and imports netted against exports).

Using Gross Domestic Product, the economy looks this way - and is driven by consumers (66% consumer driven).

GDP starts with cash flow data, separates income from expenditures, determines whether the spending meets the definition of included elements in GDP, and then must determine the FINAL spender of the money so the money is placed in the correct pocket.

And the final conclusion is that the USA has a consumer driven economy.

Really? Does the consumer drive the economy? It does if you focus on GDP. If one looks at initial expenditures instead of final, the economy looks like this before, or in parallel to, any income is transferred to the consumer:

The federal government takes money in from business (employees have tax money removed by business and sent directly to government), spends some - then transfers the majority to state governments and individuals in the form of social security et al. The USA federal, state and local governments handle 40% of GDP before transfer payments reduce this number to 17%.

The chart below shows the ratio of government money expenditures to GDP since 1980. [Note that Federal Government transfer payments to state governments, and state transfer payments to local governments, have been removed so government expenditures are counted only once.]

Click to enlarge

It is interesting what happens to government spending during recessions. Note the dip during the Great Recession despite stimulus. Also note that the government was accelerating spending until 2000. Was the Clinton economic miracle in the 90s due to increased government spending / transfer payments? This is a subject for a later post.

The consumer gets literally all their income either through employment, running its own business, or from the government. Only a consumer running its own business is directly generating initial expenses. Being an employee is an expense for a business - is the real first economic entry coming from selling products / services? Employees and materials are costs to the economy - not the drivers per se. [This argument runs afoul of who is actually BUYING the products - an economy needs buyers and sellers.] The premise here is that sellers MAY be more important than buyers - and the Federal Government and the Federal Reserve in their actions are validating this is true.

Is thinking that the USA is a government/business driven economy any more correct than believing it is a consumer driven economy? Buying and selling is a symbiotic relationship - and convincing ourselves that buying is more important than selling (as the GDP model implies) is factually incorrect.

The consumer may not be so important in the scheme of things as history shows they spend or save all their paycheck. Saving money does not help the economy. Could it be the economy works more efficiently if wages are kept to a level where consumers must spend all of their pay? The Federal Reserve's concentration on business (and lack of sympathy towards the consumer) can be understood if one views the economy as government / business driven. Of course, if pay to consumers is repressed, then savings is reduced and something's got to give in old age. Either government makes sufficient transfer payments or people must work until they die. Or both.

My usual weekly wrap is in my instablog.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.