- Noam Scheiber
- October 20, 2010 | 12:00 am
In a much-anticipated speech on Friday, Fed Chairman Ben Bernanke invoked a favorite metaphor of economists to describe the current, critical period in the recovery. Now is the moment, he said, that a “handoff” must occur between temporary boosts to growth, like government stimulus, and more lasting drivers, like spending by consumers and businesses. Bernanke stressed that the handoff was underway, but he conceded that “growth has been proceeding at a pace that is less vigorous than we would like.”
The particular source of his anxiety was consumer spending, which the chairman worried was flagging amid high unemployment, sideways home prices, and the debt we all took home from the recent subprime party. It comes as no surprise that consumers would weigh on the Fed chairman, of course. While it’s certainly possible for the economy to grow without consumers pitching in, it’s much, much easier when they do. Because consumer spending accounts for about 70 percent of GDP, a 2 percent increase raises GDP growth by almost 1.5 percentage points. By contrast, it would take a roughly 10 percent increase in investment—spending on things like factories, equipment, and new-home construction—to boost GDP growth by roughly the same amount, because investment only accounts for about 14 percent of GDP.
Unfortunately, even under relatively optimistic scenarios, consumer spending isn’t likely to impress anybody over the next several years. Instead, the backdrop for Bernanke’s comments is a debate about whether spending by consumers will fall only modestly relative to the pre-crash days, or whether we’ll see a pronounced drop that weighs on the economy’s back like a large, belligerent primate. Here’s hoping for mediocrity.