Friday, October 14, 2011
Today's release of September retail sales data may be old news by now, and retail sales aren't what drives economic growth, but they sure don't paint a picture of an economy on the cusp of recession. Indeed, the strength of retail sales—which are up 8% in the past year and have now surpassed their 2008 high by 4.5%—is impressive given that 7 million fewer people are working today than at the pre-recession peak. Yes, with 5% fewer people working, we are collectively spending almost 5% more. That is a testament to the worker productivity that has occurred in the past 3 years, and the degree to which businesses have become leaner and meaner and more profitable. Government transfer payments may be helping out, of course, but most of the big "stimulus" money is now water under the bridge, with little or no lasting effect on jobs or permanent incomes, which are the main determinants of spending. A good portion of this growth in sales has got to be due a genuine improvement in economy, even though we are still way below where we should be.
As a supply-sider, I consider retail sales to be a reflection of the underlying growth fundamentals of an economy, not the principal driver of that growth. Too many people these days are insisting that what we suffer from is a lack of aggregate demand, but that gets things backward. Supply-siders understand that it's not about how demand creates more jobs—it's how more and better jobs are what create demand. If there's a chicken and egg argument here, it's that supply comes first (supply being the result of investment and work creating jobs and output) and demand follows. Or to paraphrase the great French economist Say: "supply creates its own demand."
The reason Obama's "stimulus" plans haven't worked is that in grand (and mistaken) Keynesian tradition, they have focused on stimulating demand, not on stimulating supply. As the late Jude Wanniski used to say, "we can't spend out way to prosperity." Prosperity comes only from more work, smarter work, more and better computers, more entrepreneurs, more efficient companies, and more risk-taking. Redistributing income from the rich to the poor, in the belief that the poor are more likely to spend it than the rich, and thus more likely to "stimulate" the economy, is just plain nonsensical. If anything good has come out of pouring $1 trillion of "stimulus" money down the drain, I would hope it will be understood as a failed experiment in Keynesian economics.
The continued strength in retail sales also shows that consumers in aggregate can spend more even as they deleverage. In the chart above, note that households' debt burdens (consumer and mortgage debt payments as a % of disposable income) have declined dramatically since just before the recent recession, by about 20%. This is the biggest effective deleveraging of the household sector on record. In a sense, you could say that, based on this chart, the consumer debt bubble has burst, and we are back to levels that in the past have served to launch significant economic recoveries (e.g., 1983, 1995). Of course, some portion of this deleveraging is the result of massive defaults on mortgage debt, but it still shows that debt can be cut back dramatically without causing an economy to shrink.
For more on how debt works (how more debt doesn't create money or new demand, and therefore less debt doesn't destroy money or demand), see my July post titled "Debt musings and misconceptions." This has great relevance not only to how the U.S. economy has survived a massive deleveraging largely intact, but also to how it is not inevitable that the Eurozone must implode just because the Greeks have little choice but to default on their debt. Debt does not create demand, nor does it create growth (it can facilitate growth, but not create it out of thin air), and wiping out debt therefore does not necessarily wipe out demand. The money that the PIIGS borrowed and squandered is gone: the Eurozone economy has already paid the price of its bad investment decisions and bad spending decisions. Wiping the debt slate clean, which must happen at some point, could well prove to be the catalyst for stronger growth in the future, not the death knell of the global economy.
Finally, today's retail sales number is one more in a growing list of statistics that have thrown buckets of cold water on the notion that the U.S. economy is sick and about to slip into another recession. The bond market, which only two weeks ago was priced to the expectation that the entire global economy was going down the drain, has only just begun to wake up to the fact that pessimism has gotten way out of line with reality.
Posted by Scott Grannis at 9:24 AM