What hope is there when one of the top business journalists gets the facts wrong? In his latest New Yorker piece, James Surowiecki makes the classic mistake:
Personal consumption hasn’t shrunk as a share of the economy: in 2010, it accounted for more than seventy per cent of G.D.P., close to where it’s been for the past decade
Let’s break down what’s wrong with this statement. First, the statistical category “personal consumption expenditures” actually includes all sorts of government and nonprofit spending, including almost $1 trillion in Medicare and Medicaid spending, spending by nonprofit private educational institutions, and spending by political parties. None of this money is under the control of ‘consumers’, so there’s no possibility of individuals making the decision to cut back.
The other word that Surowiecki doesn’t mention is imports. When American consumers boost their spending on items such as clothing and electronics, much of that goes to create jobs overseas, not here. It’s devilishly tough to get the exact connection between consumer spending and imports, because the government does not actually track where imports are going in the economy. But the net result is that ‘pocketbook spending’–the amount of money that households control–accounts for much less than 70 percent of economic activity.
This is not just a semantic point. Every time somebody repeats “consumer spending is 70% of GDP’, it reinforces the false idea that U.S. growth is dependent on consumer spending returning. It’s not. I’m surprised that Surowiecki made this mistake, especially given the nature of his piece.
It’s time for me to put out a refresher policy brief from PPI on this.