The Keynesian Paradox

According to Keynesian economics, consumer spending is good and consumer saving is bad.  After all, GDP = C + I + G + (X-M) where C is consumer spending, I is spending by businesses on new capital goods, G is government spending, and (X-M) is the difference between exports and imports.

If consumers save money, it reduces C and GDP falls; consumers are making themselves worse off by saving.  On the other hand, if consumers spend more money GDP rises.  In this Keynesian Fantasyland, the more consumers spend the better off they will be:

That’s not necessarily a bad thing. Consumer spending accounts for roughly two-thirds of U.S. economic activity. So if people are buying stuff — even with borrowed bucks — the economy is growing.

But that may not be true in the Real World:

IOUs held by U.S. households rose 1.1% in the third quarter to $11.3 trillion, according to the Federal Reserve Bank of New York. That’s the biggest jump since the first three months of 2008.

***

Outstanding student-loan balances climbed $33 billion to $1.03 trillion in the third quarter, and a record 12% of loans were delinquent 90 days or more, the New York Fed said.

***

At the same time, many people with a more secure financial footing have rediscovered the pleasures of buying homes and cars and college educations — even though they may not have the money.

In both cases, the result is the same: Consumers are borrowing again.

This borrowing is one reason why GDP rose in the 3rd quarter of 2013.  I have already dealt with the flaws of GDP here.  Just as government borrowing increases GDP today but reduces it in the future, consumer borrowing also increases GDP today but will reduce it in the future when people cut back on their spending and pay down their debt.  C will fall, and so will GDP.

Lenders, for their part, think it’s swell that borrowing is on the rise.

To which I can only respond “Duh!!!”  When people borrow, lenders make money by charging them interest until the debt is paid off.  More consumer borrowing results in more money made by the lenders.  Especially when the lenders are creating the money they lend out of thin air.

Instead of listening to the Keynesians, people would be better off if they listened to the Berryian economists:

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Categories: Borrowing, Debt, Keynesian Economics

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