Working in Iowa
In Search of the Real Economy
Dec 22, 2009
By Dave Swenson
By Dave Swenson
When we struggle with our household bills we are told by consumer finance experts to write down all of our expenditures so we can know how we are actually spending our money.
Standard fixed costs like rent, utilities, day care, student loans, or a car payment are easy. Discretionary costs may require more scrutiny as they often evade our awareness. Dining out and leisure purchases are important. I buy lots of diet pop each week. Others buy fancy coffee or a couple of energy drinks a day. Some smoke, some drink, some do both, some do neither. It all adds up.
The bottom line is this: unless you figure out each and every cost you can’t get a handle on your bottom line. You next must compare those costs to your income stream to make sure you are meeting your present and your anticipated long term needs. The same process holds true for the overall economy.
What are our average national consumption costs? We spend less of our incomes on goods than we did in 1990 or 2000. Now, about 11 percent of our spending is for tangible, long lasting things called durable goods. About 23 percent goes to non-durable goods.
Services eat up a full two thirds of our spending, up from 61 percent in 1990. More than half that gain is in payments to financial services, to include the payments that we make on our consumer debt, and to health care. Combined, they were fewer than 20 percent of our costs in 1990; they are now 23.6 percent.
When we know our spending patterns, we next look at our income. Has our spending aligned with income growth, or have we financed consumption by running up personal debt? Were we buying things we did not need, not enough of what we did need, and were we saving enough? These are all important questions for us as individuals, for the economy in general, and in gauging our individual and collective prospects for recovery.
Looking at U.S. trends it is very clear our savings rates declined sharply the past quarter century. In the mid 1980s, it was more than 13 percent of disposable personal income. In 1990 it was about 10 percent. In the three years prior to the recession the rate averaged near 5.5 percent. The reason there was less to save is because we consumed more. Now, because the recession scared the dickens out of us, we’ve been saving at much higher rates; that is, those of us who can.
Finally to the bigger question: just how much of all of our consumption since the end of the last decade or so when the housing bubble first began was actually fueling a phony economy? This is very important, because the current correction we are in is not only a cyclical recession, as in recessions happen, it must also offset the chunk of growth that was fueled by irresponsible borrow-from-the-future behavior as people cashed out home equity, ran up exorbitant credit card bills, and consumed at unsustainable levels given their incomes.
Like our hypothetical household trying to get a handle on costs, the nation may well find that it was in much worse shape than it thought. Not only must it trim private spending, as it has done, but it must do so for a prolonged period in order to make the national checkbook more balanced and in line with our longer term needs and earning prospects. That means there are likely additional recovery-dragging factors to be addressed by all of us individually and collectively that will give us a slower-than-desired rate of recovery.
If big parts of the bubble economy were phony, there were too many jobs, too many business starts, and too much consumption relative to what the economy should have demanded. A corrected economy must reflect that fact, and if it is to find stability, it would assume lower annual rates of growth, slower job creation, and likely higher rates of base unemployment in its quest for equilibrium. That slower growing economy would mitigate pressure to drive up earnings, restart the housing bubble or any other substitute bubble, and send a strong signal to important production activities like car manufacturers or furniture makers to take it slow and easy.
When we add these factors to still very high rates of housing foreclosures, large and growing losses in commercial investment properties, continued write-offs of bad debt among our financial institutions, escalating bankruptcies, muted manufacturing activity, and a continued unwillingness of consumers to take any kind of a plunge into previous buying behaviors, you get an economic recovery balance sheet that does not instill much confidence for the near term.
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Dave Swenson is a long-time analyst of Iowa political, social, and economic issues. He is a staff research economist at Iowa State University and an extension-to-communities economics educator. He also teaches community and regional planners (those nefarious agents of totalitarian control) how to do economic things in their profession.
