"Real personal consumption expenditures peaked in late 2007 before the recession and by late 2010 had already recovered to that peak. Consumption today is well ahead of that peak and up substantially from its weakest point in mid-2009. The economy is not suffering from lack of consumer spending, putting a substantial dent in Rawlins’s case for more government spending on consumer stimulus."I have a lot of trouble with claims like this because of the graph below. GDP is on the the right axis, while personal consumption expenditures are on the left axis. If your only evidence is that we've passed the 2007 peak, then we've got no GDP problem either! In fact, while both have exceeded their previous peak both are still well off trend, which is why employment has not reached its previous peak.
Now I can't see how anyone can look at that graph above and say we don't have a consumption problem, but in the title of this post I did say "yes and no". Why? Because Steve is right when he says this:
"The problem instead is private investment spending. One of the first things economists teach about business cycles is that the most variable part of spending is not consumption but the investment that firms make in capital. Private investment spending has only recovered about half of its losses from the recession. Firms are simply not willing to invest in the equipment and research and development to make new products and create new jobs. That is the problem to be solved."He is right of course. I taught that to my macro students. I was taught that by every macro professor I had. And the fact is no business cycle theory that fails to say this has ever survived in macro because it's so obviously untrue. Now that doesn't mean we are silent on consumption. Consumption shocks are possible and there's a mountain of research on consumption behavior. But it's not the decisive factor in the business cycle.
I don't think this justifies the first paragraph, though. We do have a consumption problem. Some of it may be exogenous to the recession itself. Stiglitz has been making the point recently that inequality depresses consumption levels. That's certainly sensible. But to explain the very real problem with consumption in the graph above, you really have to recognize that the consumption problem is (1.) real, and (2.) a consequence of the recession. People consume less because they have less money than they used to, and they have less money than they used to because of investment problems. Low consumer demand does make things worse - it does pin us down - in the sense that declines in investment and government spending (relative to trend, remember!) are multiplied by the behavior of consumers.
So what about the solutions?
Increasing consumption exogenously will help as much as increasing investment exogenously will. And for humanitarian reasons alone we ought to have some of our recovery effort come through consumption-oriented spending. But since consumption is not the heart of the problem, I don't think that should be the end of the story. The real problem we need to solve is the investment problem.