Economic growth, vs. plain ol’ spending

Last updated on: June 2, 2014 at 10:40 pm by Jane the Actuary

Economic growth, vs. plain ol’ spending 2014-06-02T22:40:00-06:00 Jane the Actuary

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So the other day I connected an article claiming that same-sex marriage would be a boon for the economy, to the broken-windows fallacy, because, if a couple spends big bucks on a wedding that wouldn’t have otherwise happened, the money isn’t going to come from nowhere but would be money not spent on other things.

Today I’m thinking about this some more.

In principle, through creative destruction, jobs are lost — due to mechanization, due to global sourcing, etc. — but because of productivity gains, wages increase for those who hold onto their jobs. And new varieties of consumer goods spring up for those “winners” to spend their increased wages on, e.g., Starbucks coffee rather than home- or office-brewed, or yoga classes, or the like. And then jobs are created for those who would have been jobless, and everyone’s better off, in a sort of virtuous cycle (except that it’s not really a cycle).

The problem is: the new consumer goods are supposed to be the second part of the cycle: first, productivity gains put money in people’s pockets, then people find ways to entice people to spend more when their money’s burning a hole through their pockets. But median income has been flat — and, looking at the sexes separately, while median wages have grown for women, they’ve declined for men (see my numbers from back in February on long-term trends and these numbers on changes by quartile since 2000). Yes, these are median wages for full-time workers, and don’t reflect changes in labor force participation, for which I’d need to dig up a different set of numbers. But I expect they would tell a similar story.

Yes, average income has grown, and the upper-middle-class and the wealthy are doing quite well, and buying lots of Starbucks coffee and paying lots of yoga instructors.

But here’s my concern: it’s not just the wealthy who have new categories of consumer goods that have become prevalent and have, in fact, become “needs.” The median and below-median income earners “need” smartphones and monthly smartphone bills, and internet access at home, and a regularly-upgraded computer, for instance. They “need” college educations for their children. A couple generations ago, they began to “need” a wedding with a catered meal in a reception hall where their parents got married more simply; now, we’re told, same-sex couples “need” this too. The accoutrements of modern life have made their way into our culture, and have increased the amount of spending necessary to meet all these perceived needs, but, unless there’s something wrong with our metrics for inflation adjustment, only upper earners are seeing the income growth, in real terms, that means that they can afford them, without sacrificing other purchases.

Do you see what I’m getting at?

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