In his standard stump speech, President Obama now says some version of this: “We don’t need more top-down economics. What we need is some middle class economics, some bottom-up economics.”
What I guess Obama means is that we need more consumer spending to boost growth. Makes sense, right? After all, consumer spending is 70% of the U.S. economy.
Except it isn’t. Not even close.
What Obama — and many journalists and economists, too, for that matter — are referring to is the personal consumption expenditure category in the gross domestic product statistics compiled by the Commerce Department.
And, indeed, 71% of GDP comes from personal consumption rather than private investment, 13%, or government spending, 20%. (Trade actually detracted 4% from GDP in the most recent quarter.)
Here is what that looks like:
But what really goes into the “personal consumption expenditure” category? Lots of stuff that doesn’t really qualify as what most people would think of as consumer spending. As economist Michael Mandel (who made the charts in this post) notes:
But in fact, ‘personal consumption expenditures’ in the U.S. is a grab-bag category which includes all sorts of money—like Medicare spending by the government—which never passes through the hands of households. PCE also includes all the consumer goods imported into the U.S.—cars, computers, clothing, and the like—which create very little economic activity in this country.
In fact, by my very rough calculations, the money that people actually pull out of their paychecks and bank accounts to pay for domestically-produced goods and services drives about 40% of economic activity in this country. That’s still large—but the U.S. is nowhere near as dependent on consumer spending as people think.
Here’s the way the economy really breaks down:
Anyway, I thought a consumer-spending driven economy was what Obama was trying to steer America away from. Obama back in 2009:
We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity a foundation that will move us from an era of borrow and spend to one where we save and invest, where we consume less at home and send more exports abroad.
Indeed, business investment is down $1.4 trillion from where it would be if the economy had been recovering at a normal pace in recent years. Yet not only is consumer spending just as big a part of the economy as it was pre-Obama, people again seem to be borrowing just to keep up. A big leap in credit card debt in May led IHS Global Insight to speculate thusly:
It is possible, however, that households are relying more and more on credit cards to cover everyday expenses, given that job and income growth are so weak. In fact, revolving debt surged even while core retail sales growth (excluding spending on autos, gasoline, and building materials) stalled. If so, we might see additional increases in credit card debt in the coming months.
What this economy really needs is more investment and innovation and sustainable growth.