A UNC-Chapel Hill history professor decided to weigh in on the economy in yesterday’s N&O. In so doing, he proves that he should stick to history because he displays an appalling level of economic ignorance.
Professor Peter A. Coclanis dogmatically recites the Keynesian mantra that more stimulus spending is needed to provide a “push” to consumer spending.
Consider the following facts. Consumer spending tanked in May. The official unemployment rate stands at 9.7 percent and 45 percent of the unemployed have been without a job for 27 weeks or longer.
….Ironically, the best thing we could do right now to secure the long-term viability of the American economy is to provide greater levels of governmental stimulus – thereby increasing the deficit – so as to strengthen domestic private demand, bring down unemployment and render sustainable our all-too-tepid recovery.
we find, for example, that as usual in an economic slump, private consumption spending has held up much better than private investment spending: the former fell by less than 2 percent, and most of the decline was erased during the third and fourth quarters of 2009, so that by the final quarter of last year, real private consumption spending was less than 1 percent below its previous quarterly peak.Gross private domestic investment peaked in 2006. Between the first quarter of that year and the second quarter of 2009, it fell by almost 34 percent. During the following two quarters, it rose by only 10 percent, so that late last year it was still (when measured at an annual rate) running about 29 percent below its level early in 2006. Such a huge shortfall in investment spending portends an extended period of slow economic growth in the next few years, and perhaps in an even longer run. Worn-out equipment, obsolete software, ill-maintained structures, and depleted inventories are not the stuff of which rapid, sustained economic growth is made.
Granted, personal consumption expenditures represent 70 percent of gross domestic product, but journalists should know from Econ 101 that GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy — intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages — to avoid double counting. I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP (using gross business receipts compiled annually by the IRS). By this measure — which I have dubbed gross domestic expenditures, or GDE — consumption represents only about 30 percent of the economy, while business investment (including intermediate output) represents over 50 percent.
Thus the truth is just the opposite: Consumer spending is the effect, not the cause, of a productive healthy economy.