The thoughtful Matthew Klein, over at FT Alphaville:
The changing nature of Americans’ income: "Consider what this has meant for consumption...:
...This strikes us as the strongest argument that something fundamental changed with the housing bust. Consumption growth in excess of income growth was sustained by persistent declines in the savings rate, massive borrowing against appreciating — but illiquid — assets, and loosening credit conditions. That process couldn’t continue forever, and it didn’t. (Redistribution of income from those with relatively high savings rates to those with lower savings rates probably would have helped, though.) The result has been a recalibration of consumption towards income.
Had real consumption per person kept growing at its 1952-2006 trend, we would all be spending about 18 per cent more right now than we actually are. Two years ago, economists at the Dallas Fed concluded from this that the financial crisis cost the US economy as much as $30 trillion in present value. If that’s not a good justification for significantly different approaches towards macroeconomic policy and financial regulation, then nothing is.
The trend growth in consumption was maintained and driven after the late-1970s beginning of the American productivity-growth slowdown by two things:
Most importantly, the sharp rise in female labor-force participation--itself the rise primarily of feminism and secondarily of pressure on family budgets as male wage growth fell below expectations.
Secondarily, reductions in savings.
The sharp break in trend consumption growth as of 2008 was, itself, also driven by two things:
Most importantly, the collapse in output relative to potential, and the failure thereafter to put American workers back to work at what had been normal levels of economic intensity.
The (partial) reversal of the decline in the savings rate.
Matt is thus right in saying that there has been "a recalibration of consumption towards income". But by far the bigger action has come from:
- The fall in the trend of income.
- The end of the feminist era in which labor-force participation rose from decade and decade.
- The fact that the late-1990s productivity-growth rate speedup was not the end of the productivity-growth rate slowdown that had begun in the 1970s, but only a temporarily blip.
With each passing year, Robert Gordon's growth pessimism looks more and more likely to be true, at least for measured real GDP growth...