Time To Toss The Textbook on Economics?

Time to Toss The Textbook - Newsweek Business - MSNBC.com

We once thought we understood consumer spending, the economy’s mainstay. For decades, disposable income and consumption spending advanced in lock step. Americans spent a bit more than 90 percent of their after-tax income and saved about 8 percent to 10 percent. In 1959, consumer outlays were 92 of disposable income. The figures for 1969, 1979 and 1989 were 92 percent, 91 percent and 93 percent. Being so steady, consumer spending provided stability during recessions?in contrast to more sensitive investment spending on business plant and equipment and housing. Since 1960, consumer spending has dropped in only two years; investment spending has dropped in 13.

But since 1990, consumer spending has changed. It’s consistently outpaced income growth. In 2004, Americans spent 99 percent of their disposable income and saved only 1 percent. The main cause is the “wealth effect.” In the 1990s, higher stock prices caused Americans to spend more; now higher home values (up 55 percent since 2000 to $17.7 trillion) are doing the same. So consumer spending increasingly depends on “asset markets”?stocks and homes?and not just income. Query: suppose the next recession depresses both stock and real-estate prices. Would consumer spending fall and deepen the slump?

What an interesting piece. Check it out.