As the chart below shows, personal outlays (i.e. spending) has grown significantly faster than wages over the past decade. Even before the crisis, consumers spent more of what they earned.
Since the 2008 crisis, wages initially declined (and have since remained stagnant) and the level of savings has moved higher (both of which are negative for consumption on a stand-alone basis), but spending remains strong.
How is this possible?
Well, when one adds in transfer payments (i.e. money provided by the government) and subtracts less taxes from wages, we see a different story... growth that has actually outpaced consumption since the downturn.
The reduced tax burden is a result of lower incomes to tax, a lower tax rate via the progressive tax structure, and tax cuts enacted to stimulate demand.
Telling (to me) is that over the last 10 years, wages plus transfer payments less taxes have grown at pretty much the exact same rate as personal outlays, despite weak wage growth. Going forward, unless there is change in the austerity sentiment that has been the focus of both Republicans (less spending) and Democrats (higher taxes), expect the boosts we have seen, to soften.
If that happens, we'll likely need actual wage growth via an employment recovery in order for the consumption rebound to continue.
Source: BEA
I understand the data and policy are two different things but this data is very stark at telling a massive policy problem. A problem that in IMHO is on par with Greece and their Great Transfer state system that led to their collapse.
ReplyDeleteIs it not obvious that government is:
a) Horribly inefficient at transfer
b) Cannot just fiat create transfers out of thin air
but yet, that is the fiction being read and fed to the American public. This is sheer lunacy.
This is a great chart--I don't think enough people realize how consumer spending has been supported by govt transfers in recent years. Thanks for posting.
ReplyDeleteGreat chart Jake, very insightful!
ReplyDeleteWith regards to the first anonymous poster, the chart does a great job in demonstrating that during the downturn the government have been quite effective at transfer. How else do you explain that in spite of a drop in wages, and an increase in the savings rate, that personal outlays have resumed their former trajectory (albeit at an offset)? Or would you have preferred a deeper recession, higher unemployment, more house foreclosures and more bank failures?
Jake, your last point is spot on. With the government looking to cut back spending, wage growth will have to kick in to offset. The country needs a miracle boost in productivity.
p.s. if you ever plot this chart again, could you include a panel containing Transfer Payments - Taxes Paid so we could better see how gov't support has changed over time?