Consumers Are Depressed Beyond Reason

How bad off are we? Examples abound, but the fact that markets hang on every word Ben Bernanke says ought to tell you how far down the road to ruin we've traveled. Has this man ever gotten anything right?

I usually pay no attention to the remarks of the Fed Chairman, but I was struck by this story in the New York Times called Fed Chief Describes Consumers as Too Bleak (hat tip, Tim Iacono).

WASHINGTON — Ben S. Bernanke, the Federal Reserve chairman, offered a new twist on a familiar subject Thursday, revisiting the question of why growth continues to fall short of hopes and expectations.

Mr. Bernanke, speaking at a luncheon in Minneapolis, offered the standard explanations...

Then he said something new: Consumers are depressed beyond reason or expectation.

Oh, sure, there are reasons to be depressed, and the Fed chairman rattled them off: “The persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high.”

However, Mr. Bernanke continued, “Even taking into account the many financial pressures that they face, households seem exceptionally cautious.”

Consumers, in other words, are behaving as if the economy is even worse than it actually is.

Economic models based on historic patterns of unemployment, wages, debt and housing prices suggest that people should be spending more money. Instead, just as corporations are sitting on their money, households are holding back, too.

Depressed beyond reason or expectation? Good Lord! There is lots of subtext to explore here.

Those "economic models based on historic patterns" are Keynesian models which discount the importance of debt and the distribution of income, as I described in Dude! Where's My Recovery?, which was based on the insights of Australian economist Steve Keen. Here's a quote from that post.

Thus in Bernanke and Krugman's happy world, one person's liability is another person's asset (Krugman) or a redistribution from debtors to creditors (Bernanke). And if we sufficiently pare down the model to take this into account—Krugman says it is quite common to abstract altogether from this feature of the economy—it is easy to see that the aggregate debt level has no macroeconomic effect. And if you read Krugman's columns carefully, you will see that he always makes this assumption.

But this assumption is more than profoundly wrong, as Keen and common sense argue—it is despicable, too. Although Keen doesn't get into it, I will. If the aggregate debt level makes no difference to our ability to boost "consumer" spending, and if the very wealthiest Americans have received almost all of the income gains over the last 30 years, which they have, then it follows that spending by the rich can smoothly replace your spending, GDP grows, and we're all better off for it.

In other words, if you can not increase your spending because you owe Jaime Dimon $17,000 in credit card debt, taking on new debt is out of the question, and you're socked with the interest payments, but Jaime Dimon's income is increasing as a result of those payments, there is no real change in the macroeconomic picture because one person's liability is another person's asset, and this is merely a redistribution from Main Street to Wall Street. Examples like this can be enumerated ad nauseam.

This explanation shines a light on the bizarre statement consumers are behaving as if the economy is even worse than it actually is. Some time ago, I made the point that there are two economies, not one. There's the economy of the wealthy and well-off, and another for the rest of us. These Keynesian macroeconomic models not only discount household debt levels, but they also view income in the aggregate. These models paint a false picture of the prosperity of the whole, even if 80% of the people are down and out.

So-called "consumers" are generally spending according to their means and expectations. They know exactly how bad the economy—the economy they live in—is.

“People are on edge waiting for the other shoe to drop,” John Williams, the president of the Federal Reserve Bank of San Francisco, told the Seattle Rotary Club on Wednesday. “In fact, the latest consumer sentiment readings are near the all-time lows recorded in late 2008 during the most terrifying moments of the financial crisis"...

Mr. Williams noted a recent survey finding that 62 percent of households expected their income to stay the same or decline over the next year, the bleakest outlook in the last three decades.

“It’s hard to have a robust recovery,” he said, “when Americans are so dispirited.”

There is a longstanding debate among economists about the importance of confidence. Research has found that consumers are not very good at predicting the future. Optimism often fails to correlate with growth; pessimism doesn’t necessarily foreshadow a recession.

Still, it seems intuitive that a lack of confidence can drag on the economy. As pessimistic people pull back — deciding that there is no point in looking for work; that this is not the year to go on vacation; that it may make sense to stop eating in restaurants — the economy shrinks.

Mr. Williams has got the situation exactly ass-backwards. Which of these statements is true?

1. The economy is not recovering because Americans are dispirited.
2. Americans are dispirited because the economy is not recovering.

If you guessed #2, you have more common sense than Ben Bernanke does. Williams and Bernanke believe #1 is the correct answer. To reach this bizarre conclusion, Williams contradicts himself. If 62% of households have a realistic expectation that their income will stay the same or decline over the next year, why on Earth would they spend beyond their means now? They are "dispirited" because they have no economic prospects. Ultimately, they are "dispirited" because events of the last three years have made it abundantly clear that the leading political puppets and those pulling the strings don't give a damn about them. Those are good reasons to be depressed.

Generally speaking, the depressed among us have a more realistic view of what's going on than the oblivious ignorance-is-bliss crowd for whom nothing ever really happens and the future is always bright.

Williams, Bernanke and the Times are referring of course to The Paradox of Thrift, which says the economy is not recovering because Americans are not spending like there's no tomorrow. Why would ordinary Americans have any confidence in the future? I last talked about the paradox in The Death Of Keynesian Economics—

But as I pointed out in my post The Paradox Of Thrift, it is only sensible for Americans to cut spending and reduce their financial risks, especially (but not exclusively) when they have little confidence in the future. Nonetheless, Keynesians will urge them to spend money anyway, to throw caution to the wind. This patent absurdity is made far worse when people are urged to "consume" far beyond their means, to borrow money and spend it to buy more stuff...

... Keynesian economists want Americans sacrifice their own well-being by spending money they don't have to avoid deflation. And that's what Americans did all the way through the debt-based consumption binge of the Bubble Era (1995-2007). Those bubbles were designed (consciously or not) to get people to spend money they didn't have, to keep the Keynesian Consumption party going even though disposable income didn't justify that spending...

Thrift is not a threat to the economy. As the old saying goes, thrift is a virtue, and it always has been.

So now we will be told that Americans are depressed beyond reason or expectation, adding further insult to grievous injury. If only it were true.

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[Bill Hicks]

Maybe we need President Hopey-Changey to echo Chimpy Bush and declare that to honor the 10th anniversary of 9/11, people should do their patriotic duty and resume shopping.