Scenes from the Class Struggle

Dean Baker recent critique of Krugman is right on the mark (see the K-man reply here; yes he agrees with Dean, so nothing to see here really). What Dean suggests is that this (the 2007-9) recession was not a typical financial crisis and the financial sector is not precluding the recovery. And consumption is not being held by debt deleverage, being at below peak, but still quite high levels. Dean suggests that only government spending and exports would allow the economy to get out of the hole now.

As much as I agree with Dean that we need more government spending (I'm more skeptical about exports and the need for a devalued dollar, but that's a different story), I think that there is something to be said about consumption. Dean is looking at consumption as a share of disposable income, and measured that way consumption seems fine. However, when you look at the data on consumption expansion (at the BEA here) you see a few things. First, consumption is not consistently growing above GDP, in fact it is below in the last two quarters. Also, consumption of durable goods has never recovered since the crisis and still has negative growth rates. Finally, and more importantly, disposable income (in particular wages, that have been stagnant) could grow faster, and allow for faster growth of consumption rates without changing the consumption to disposable income ratio.

So I would argue that better income distribution and more consumption would be good too. Note that I'm not very fond of the 'New Puritan' argument against consumption, that sees consumerism as one of the worst things in modern society. In particular, the levels and patterns of consumption of the masses can and should expand, and not just in the US. Also, the logic of consumption is one of the few areas in which popular common sense ideas do get effective demand right.

Like Marge Simpson in the episode titled "Scenes from the Class Struggle in Springfield" (from 1996) when Lisa discovers a Chanel suit for Marge, but she is reluctant to buy it. But the Puritan in Marge eventually gives in to the Keynesian-consumptionist desires though.

Marge: It wouldn't be right to buy something just for me. If it were a suit we all could wear, maybe... -- Marge tries on a Chanel suit.
Lisa: Come on, Mom, you never treat yourself to anything.
Marge: Oh sure I do. I treated myself to Sanka not three days ago. -- You were out of Montreal Morn, I presume?
Lisa: Just buy [the suit]. You don't have to rationalize everything.
Marge: All right, I will buy it. It'll be good for the economy. -- All Keynesian models considered.

Chanel suits for the masses, that's a rallying cry one can believe in.