The Idiocy of the Financial Press

Dean Baker takes the financial press to task for showing a fundamental ignorance about the state of the American consumer. I've added bold to the key bits:

Investors Should Stop "Worrying" About Consumers: They Don't Have Any Money

USA Today tells us that the stock market dropped because investors are worried that consumers have bad attitudes and therefore will not sustain consumption. Consumers may have bad attitudes, but the real reason that they are not spending money is that same reason that homeless people don't spend money: they don't have it.

The collapse of the housing bubble has destroyed more than $6 trillion in housing wealth. The plunge in the stock market has eliminated another $6 trillion. The predicted result of the loss of this much wealth would be a fall in annual consumption of more than $500 billion a year (@3.5 percent of GDP).

In short, it would be very surprising if consumption had not fallen sharply. USA Today should find some economists who can explain this fact to readers so that investors can stop worrying and come to grips with reality.

There are empirical formulas for how much increased wealth increases the propensity to spend. And as Baker is repeating here, the reverse is true as well: loss of wealth makes people spend less.

It is a well know fact that people try to average out their spending over a lifetime. So if they get a windfall, they feel better and spend more. Tell them their house is worth less and destroy a big portion of their retirement savings and they worry and spend less. Currently the American consumer has moved from spending more than he earns to where he is saving about 6% of earnings and using this to pay down debt. Consumer debt is at an all-time high and when interest rates move up in a year or two, this will really hurt if Americans have not been able to reduce this burden. So, as Baker points out, don't expect the consumer to go on a buying binge!