- but in the article this AD concept is just assumed and inserted into what is actually a "good news" story being presented: the people interviewed choosing to save more, pay off loans, and explaining they were now able to save for retirement:
When oil prices began to dive in October, analysts and investors spoke of an economy poised for a higher gear: Cheaper prices at the pump amounted to a massive tax cut for the middle class that would stimulate discretionary spending and create more jobs.
Personal spending was up a tepid 1.8 percent in the first quarter, well off the pace from last year. Meanwhile, Americans are dumping more money into their savings accounts. If their habits between January and March keep up, consumers this year will save an extra $800, according to government data.
The change in behavior appears to be at least partly psychological. The recession coincided with a wave of busted home loans, premature retirements, long unemployment lines and depleted retirement savings. Americans have since worked to rebuild their financial security. Millennials, according to researchers, are perhaps the most surprising conservative spenders, shaped by recent years in which they incurred student debt, fought for jobs and were forced to take lower-paying positions.
"Now, more are getting jobs, more moving out of their parents' home," said Warren Solochek, vice president of client development at NPD Group, a market research company. "But that group is much more cautious because they've lived through this crappy time."
According to Bankrate.com, a financial services company, only one in seven Americans have spent their gasoline savings on discretionary items such as travel and dining out. Separate government data showed that spending is flat on electronics, groceries and furniture.
For Richard Knipp, 57, a member of Teamsters Local Union No. 142 in Gary, Ind., cheaper gasoline prices have allowed him to maintain his daily spending while also contributing 3 percent more to his retirement fund. He recently began doling out $200 monthly to each of his three grandchildren for their long-term savings accounts.
"I opened those accounts even before the recession," Knipp said, "but some years I didn't put in anything. Now I'm putting in more."
Economists are uncertain how long the new prudence will last and say the question marks a major fork in the road for U.S. growth.
Historically, spikes in the savings rate have proven temporary, Jason Furman, chairman of the White House Council of Economic Advisers, said in a statement Friday. If the savings rate snaps back to its previous level for the rest of 2015, consumption will grow at a brisk 4 percent rate -- enough to drive faster economic growth.
Sumner quotes the Washington Post, and then points out that for many of the "well-educated readers" these models were taught to them when they "took basic macro in college, with the Keynesian cross model." Apparently we should all believe this model - but this is impossible to do if you understand what the model actually says - because it is simply absurd.
It really doesn't make much sense to use this model. You have all good news about how people are choosing to improve their lives and by using this model,and you are assuming that because it involves higher savings and lower consumption that this will hurt GDP growth. We are already hugely in debt, in the US and UK. But they are arguing that we need to give up on any goals of improving our financial security, saving for retirement, and paying down our debts if we want to increase economic growth.
But, as Sumner puts it: "this sort of speculation about future growth is about as fruitful as reading tea leaves or tracing the lines in someone's hand." Indeed, the Keynesian cross model makes zero sense, at least the way it is taught. It has aggregates being toyed with in equations in order to produce certain outcomes - and it produces its result by ignoring part of the economy: by ignoring the investment and jobs that are created out of the higher savings and via the debt-paydown exchanges it produced the result that we need more consumption. But, all those economic activities will lead to jobs and growth too.
Sumner argues that growth is better determined by watching the Fed. I am not going to argue that from an economic perspective in detail today, but I will say that people achieving their own goals is more likely to be good for the economy than trying to push people to consume more and save less. This is particularly true if doing so involves injecting banks and wealthy borrowers with money.
I think letting people save and be financially responsible as they see it - and to the extent that they want to - is probably better for the economy and for overall fairness to the people, respecting their freedom to choose how they use their personal resources and not to essentially tax those savings and their attempts to repay debt in order to give money to massive banks and credit card companies, as well as borrowers..