Yet more on the consumer bust, this time from David Backus (via Andrew Gelman):

The suggestion … is that the economy is growing slowly because consumers aren’t spending money. But how do we know it’s not the reverse: that consumers are spending less because the economy isn’t doing well. As a teacher, I can tell you that it’s almost impossible to get students to understand that the first statement isn’t obviously true. What I’d call the demand-side story (more spending leads to more output) is everywhere, including this piece, from the usually reliable David Leonhardt.

We can’t know, for sure. But here’s an important clue:

If a weak economy inexorably led to weak consumer spending, which in turn led to an even weaker economy, we would never escape recessions. We’d enter an inescapable spiral. You often hear warnings of such a cycle in the latter stages of a typical economic slump. Unemployment is high and even rising. Income growth trails inflation. Bankers and corporate executives are uncertain about when the recovery will begin.

Robert Barbera, an economist and author, will sometimes tick off this list of the grim realities in the late stages of a recovery and then conclude by bellowing, “And it was ever thus!”

His point is that recoveries are able to begin even when consumers seem to have little available money, and he’s absolutely right.

After the 2001 recession, the economy did not begin adding jobs until 2003 — but consumer spending was rising again by the end of 2001. Likewise, in the early 1990s, job gains did not start until the spring of 1992, but consumer spending began to recover in 1991. In 1982, consumer spending started to pick up speed in the summer, while the economy was still shedding hundreds of thousands of jobs.

How does this happen? Even before employers begin adding jobs again, the pent-up demand that exists in the late stages of a recession — for new cars, appliances, even vacations — asserts itself. People start shopping again.

The absence of this dynamic is what distinguishes the bursting of a bubble, like the one we’re experiencing now. There is not as much pent-up demand, because of the earlier bubble excesses. Even more important, consumers are not able to fulfill the pent-up demand they do have, because they are still paying down debts and trying to rebuild their finances.

Ultimately, this issue is not either/or. An improving job market would, of course, play a big role in lifting consumer spending and the economy. But I think it’s a mistake to view consumer spending as merely, or even predominantly, an effect of other economic changes.

Mr. Gelman notes this question may not be the most important one anyway:

Regarding the causal question, I’d like to move away from the idea of “Does A cause B or does B cause A” and toward a more intervention-based framework … in which we consider effects of potential actions.

That is, what steps should the government now be taking to help put people back to work?

Article source: http://feeds.nytimes.com/click.phdo?i=5eec36283511f6b1a51da70d388f53ba