Nearly everyone laments the sad state of consumer spending, blaming it for the failure of the economy to recover from the Great Recession. Fed Chairman Ben Bernanke repeated this the other day. He pinned the bad economy on unjustifiably depressed consumer spirits.
There are just two problems with this position.
First, consumer spending is a consequence, not a cause, of economic growth. Increased consumer spending follows economic growth, so it cannot be the case that increased consumer spending creates economic growth. That’s like arguing wet streets cause rain. Economic growth requires savings and investment — and savings is consumption deferred. Understanding this is a problem only for those who fail to see the economy as a series of productive stages stretching back in time from the consumer level. (Keynesians insist that layoffs in the retail stage prompted by a fall in consumer spending must result in mass unemployment, as though the retail stage is all there is to an economy.)
Second, as Robert Higgs show here, consumer spending has already recovered!
According to these [government] data real personal consumption expenditure recovered from its recession decline by the fourth quarter of 2010. Continuing to grow, it now stands (as of the most recent data, for the second quarter of 2011) even farther above its pre-recession peak. . . .
The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed.
By trying to stimulate consumer spending (or by having government substitute for it) politicians push things in exactly the wrong direction. So does the Fed. Its low-interest-rate policy discourages saving.
Looks like the best policy is government retrenchment across the entire front and then laissez faire.