Economists, despite their lofty titles, often mislead the public with misguided theories and impractical advice. It’s not uncommon for some to articulate ideas that seem absurd, while fervently defending them. Hardly a day passes without an economist revealing a lack of common sense.
Consider the “Cash for Clunkers” program. It’s widely recognized, excluding a few outliers, that providing financial incentives to scrap well-functioning vehicles ultimately diminishes value. Nevertheless, many economists celebrate the surge in demand for new cars and the subsequent increase in GDP.
So, if this approach truly led to prosperity, why not provide everyone with cash for new vehicles? That would invigorate automaker production. Similarly, why not finance everyone’s home purchases to bolster the housing market? Such ideas sound appealing, but they belong in a dream world.
Another common misconception in contemporary economic thought is that wealth is generated by borrowing and spending, rather than through saving and investing. Simple reasoning reveals the flaws in this logic, yet many economists continue to pursue this misguided path.
This phenomenon is recognized in statistical circles as a Type II Error; however, at the Economic Prism, we prefer to label it sheer foolishness. Regrettably, economists often repeat these errors time and again.
Shop ‘til You Drop
This week, several economists appeared on Bloomberg, explaining confidently why the U.S. economy remains resilient in the face of global economic challenges. Surprisingly, they failed to mention an abundance of affordable resources or a highly skilled workforce as factors.
What they did cite as America’s considerable economic advantage is the nation’s proclivity for shopping. According to a Bloomberg article, American consumers are expected to “shop ‘til they drop” to help navigate through global instability.
The article states, “Call it America’s $11 trillion advantage: Consumer spending is likely to steer the U.S. economy safely through the shoals of deteriorating global growth and turbulent financial markets.”
According to the article, “The combination of more jobs, falling gasoline prices, and low borrowing costs will help boost household purchases. Such tailwinds are likely more significant than Europe’s struggles or the slowing growth in emerging markets that led the Dow Jones Industrial Average to erase its gains for the year.”
Here’s what several professional economists had to say about the role of consumers in the U.S. economy:
Consumers Don’t Stand a Chance
“We’ve got several factors working in favor of the consumer right now,” remarked Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. “To have that kind of strength is the biggest asset for the U.S. It’s a pretty solid foundation.”
Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, added, “We’ve got the proverbial 800-pound gorilla — the consumer. Households are focusing more on the positive aspects, largely due to the labor market. The U.S. is likely to remain relatively unaffected by global issues.”
Dean Maki, chief U.S. economist at Barclays Plc in New York and a former Federal Reserve economist, noted, “In a slowing global growth environment, a consumer-dependent economy is a favorable situation. Resilient spending is one reason the outlook for the U.S. remains positive.”
Lastly, an economist based in Waltham, Massachusetts, commented, “I don’t see a direct connection between economic turmoil overseas and consumer behavior here. For the average American, the link to those global concerns is very tenuous; their focus remains on the U.S.”
These remarks reflect a significant misunderstanding of the economic landscape. As the Federal Reserve begins to taper its money-printing endeavor, the primary support system for corporate profits will vanish. The resulting economic impact could be staggering. After all, even in the U.S., consumers face a challenging future.
Sincerely,
MN Gordon
for Economic Prism
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