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Economic Policy

Consumption Spending Is Not The Problem

The reoccurring, worn-out claim of under-consumption throughout the current recession as a justification for more stimulus spending continues to be made in that it will motivate consumer spending. However, the data presented below suggests that under-consumption is not the problem as it has recovered to its pre-recession levels and continues to grow.

As Robert Higgs has observed, the problem according to the data lies in the fact that private investment spending continues to remain well depressed, far below pre-recession levels.

H/T: Carpe Diem

The question must follow: why has private investment failed to recover while consumption spending has? Again, Robert Higgs notes that:

“Private investors, despite the full recovery of real consumer spending and the increase of real government spending for final goods and services, remain apprehensive about the future of new investments, especially new long-term investments. I have argued repeatedly during the past three years that an important reason for this apprehension and the consequent reluctance to make new capital commitments is regime uncertainty—in this case, a widespread, serious fear that the government’s major policies in areas such as taxation, Obamacare, financial reform, environmental regulation, and other areas will have the effect of depriving investors of control over their capital or diminishing their ability to appropriate the income that the capital generates.”

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