A Keynesian House

by Don Boudreaux on October 6, 2010

in Complexity & Emergence, Myths and Fallacies, State of Macro, Stimulus, The Crisis, The Economy

Here’s a letter to the New York Times:

Reciting Keynesian mythology, Daniel Gross writes that “for this recovery to mature, broaden and persist, the greatest economic force known to mankind – the American consumer – has to get back in the game” (“Credit for the Recovery,” Oct. 6).  In fact, consumers have never been out of “the game”: in the second quarter of 2010, personal consumption spending was at an all-time high of $10.46 trillion – more than 70 percent of GDP.*

The problem isn’t inadequate consumer spending; the problem is private investment made inadequate by the prospect of higher taxes and a barrage of burdensome and vague regulations.  As economist Robert Higgs noted a few days ago, “In the most recent quarter, gross private domestic investment was still running at an annual rate more than 20 percent below its previous peak.  Net private investment was fully two-thirds below the previous peak.”

For policy makers to focus on reviving consumer spending while private investment is drying up is like a homeowner focusing on installing more walls while the foundation of his house is crumbling.  The fact that the bulk of the house’s surface area is made up of walls does not mean that walls provide the house with its principal support.

Sincerely,
Donald J. Boudreaux

* I calculated these figures from data found in the Higgs article linked to in my letter.

After reading this letter, George Selgin e-mailed to me the following note:

Consider what Edward Chamberlin had to say back in 1934.  Investment spending, he observed, “has been almost, if not completely, overlooked in the very great preoccupation of the recovery program with increasing consumer’s buying power.  The truth is that, in the current depression, in spite of unemployment, purchases of consumer’s goods have fallen off much less than have investments (purchases of capital goods).”  (“Purchasing Power,” in The Economics of the Recovery Program.)

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