I do want to get to the NGDP petition today, but the following actually relates to a lecture I am giving this morning so I am going to throw up at minimal cost.
At least causally we have long thought of consumer sentiment as being an important determinant in spending. This has always struck me as contrary both to human nature and economic principles.
I’ve said that consumer spending is held in check by a single phrase: “Your application for credit has been denied”
Indeed, the very fact that banks turn away paying customers – rather than simply raising the price on them – I think is key to understanding the business cycle. Its one of those odd but key facts that tells us something important is going on under the surface. Similar, is the fact that the spread on Prime Adjustable Rate Mortgages is higher not lower than Prime Jumbo 30 year.
On the surface this makes little since given the huge imbedded option in the 30 year mortgage. This tells us something is odd about ARMs and since in an environment of falling home prices fixed rate mortgage debt becomes a “radically sticky price” this tells us something important about how economies get themselves in rough shape.
But, enough of all that, you come to Modeled Behavior for charts.
Here is growth in real retail sales versus consumer sentiment.
Pretty good. But, here is growth in real retail sales vs. a survey of senior loan officers willingness to issue new consumer installment loans.
Consumer sentiment would tell you that retail sales should be in the toilet. Bank willingness to lend should tell you they are surging and indeed, they are surging.
This is why I believe that bank willingness to lend, not consumer willingness to spend or animal spirits of investors is what matters.
Further, I think when you put bank lending front and combine that with Fed policy you see that “savings” is not as meaningful a concept as we might think.
The amount of savings in the economy is a result of what goes on in capital markets and – I think – consumer behavior can only impact this through effects on inflation. Changes in consumer behavior will change the relationship between savings and inflation, but its not really correct to think of savings as being determined by consumer behavior.
This is all kind of hazy and I depend on Brad Delong to point me to important historical references of people having worked all this out before.
Also as a side note: I am always open to advice and criticism but I think Brad Delong misunderstands me. I am not suggesting that some jobs do not create value but that we are currently experiencing a job crisis not a value producing crisis.
Said another way, policies which increase employment even if they result in less efficient production of consumption goods will make people happier.
11 comments
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Wednesday ~ October 19th, 2011 at 11:19 am
Andy Harless
This sounds like a Greenwald-Stiglitz kind of thing.
Wednesday ~ October 19th, 2011 at 11:35 am
Wonks Anonymous
“Animal spirits” is a domain for psychologists. Economists who resort to it are basically throwing up their hands.
Wednesday ~ October 19th, 2011 at 11:37 am
Wonks Anonymous
Also, unemployed people are not very “efficient”. Are you really talking about the average efficiency of those who are employed?
Wednesday ~ October 19th, 2011 at 11:45 am
Sid
I wonder if you would get the same result if you had split the retail sales into durable and non-durable goods.
My hunch is that durable goods (purchases that are typically expected to have a use over a long time) have followed consumer confidence rather than consumer credit.
The data is easy to come by, I am just lazy.
Wednesday ~ October 19th, 2011 at 11:49 am
Blake
“policies which increase employment even if they result in less efficient production of consumption goods will make people happier.”
You really are throwing up your hands here. If employing the unemployed causes a reduction in productivity then shouldn’t we just pay them to stay home? Or does some of the happiness derive from the mistaken belief that they are doing something productive? And for how long can we maintain that illusion?
Wednesday ~ October 19th, 2011 at 4:38 pm
Lord
Paying them to stay home will also result in a reduction in productivity. They are doing something productive, merely not as productive as it could be with lower output, but this is an measurement deficiency because we don’t count the productivity loss of the unutilized as a cost.
Wednesday ~ October 19th, 2011 at 12:51 pm
Axel
Thank you for these enlightenning charts. I’ve always wondered why consumer confidence is a so bad predictor of consumption (@Sid: even consumer durables, just look at auto sales for instance).
The point i don’t get is how you put this into a general macro model. I mean if savings is not arising from a consumer choice but a bank lending choice/credit availability constraint, how do you rewrite intertemporal constraint with that kind of credit cycle features ? does it mean that consumer budget constraint just does exist ?
thanks
Axel
Wednesday ~ October 19th, 2011 at 1:18 pm
nanute
Mr.Smith,
Banks aren’t lending. The question is why aren’t banks lending. Several thoughts come to mind: overstated asset balance sheets, a lack of “credit worthy borrowers”, and what I think is the most important factor, interest rates are too low relative to the risk premium. It is much safer to borrow at the discount window, and have the government pay you for lending you money. Talk about adding insult to injury.
Wednesday ~ October 19th, 2011 at 1:48 pm
Benny Lava
Judging by the increase in pay day and title loans I see I would say that the statement that banks aren’t lending assumes that the only lending is big banks.
Wednesday ~ October 19th, 2011 at 4:18 pm
Lord
The animal spirits we are talking about was the willingness of lenders to lend to anyone capable of fogging a mirror so long as it was backed by real estate. Now, not so much. When you believe prices only go up and discover they don’t, I would hope you change your behavior.
Wednesday ~ October 19th, 2011 at 5:43 pm
Becky Hargrove
Don’t back away from the point of this production dilution argument. Clearly, production dilution of any kind is not the solution, but the actions of those presently not being measured in economic activity, do count. How might such activity be measured without simply falling back on monetary values? How might incentive translate into new wealth that does not rely upon credit? Proceed from there. Likewise, how can skills be linked to money without diluting productivity? This is the present challenge.