Consumer spending won't save the economy

If Americans shopped a little more, the economy would get a much needed boost. Instead, they've been deleveraging — focused on paying off their debt, and spending more cautiously.

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This is a myth, of course. Paying off consumer debt is a good thing. Shopping won't save the economy, jobs and income growth will. From June 2009 to June 2011, household incomes fell by 6.7 percent. Our pay has failed to keep up with inflation. The unemployment rate for men between 25 and 34 years old with a high school diploma is 14.4 percent, compared to 6.1 percent pre-recession.

James Surowiecki lays it all out in The New Yorker:

It’s well established that when housing prices go up people feel richer and spend more: the rule of thumb is that they spend between five and seven per cent of the increase in housing wealth. But when housing prices go down people cut their spending by the same amount in response. Between 2006 and 2011, American homeowners saw the value of their homes drop by seven trillion dollars or so. That means that—even if consumers had no debt at all—we’d expect a dropoff in consumption of about four hundred billion dollars. Toss in the steep decline in the value of people’s retirement accounts and the sense of fear engendered by the near-meltdown of the global financial system, and it’s hardly shocking that consumers are cautious. Given how much wealth Americans lost and how weak the job market is, the real wonder is that spending has proved as resilient as it has.

If we could fix the economy by shopping, I'd do my part and buy my family some very nice gifts for Christmas. But I know that some of my underemployed friends and family members would prefer to have a good, stable job over any gift that could be bought for them. Bring on the jobs.

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