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Richard E Walrath: Propensity to Spend

Propensity to Spend

By Richard E Walrath

The rule-of-thumb figure used for calculating consumer spending, as a percentage of GDP, has been 2/3, or 66%, for years.

Yet, during the past three years consumer spending has shot up from 69.7% in 2001, to 70.3% in 2002 to a total of 70.5% for 2003 – while wages for most people have been stagnant or declining for the same period.

So why has the percentage increased? What caused this to happen, and what does it mean?

Tax cuts for the rich had little effect on the increase in GDP. They never do – if you’re rich, you can buy whatever, whenever you want. Giving money to the rich is a poor way to increase consumer spending. If you already have more money that you can count, why would getting more make you spend more? If you wanted something, you would have already bought it.

The rich person spends more dollars, but a smaller percentage of his income. That’s the principle known as the propensity to spend at work. The higher the income the lower the propensity to spend. The lower the income, the higher the propensity to spend. The less income you have, the more likely you are to spend it.

If you want money to get spent, put it in the hands of those with lower incomes.

The few crumbs thrown to everybody else got spent – the $300.00 income tax refunds and the small amounts received in tax credits at the bottom and lower income levels. But these did not amount to much.

The reason consumption is a higher percentage of GDP is that consumers have borrowed incredibly and have spent the money –- that’s the reason most people borrow. What else would they do with it?

The incredibly low interest rates set off the binge of buying and refinancing homes. Putting their houses in hock gave them a few extra dollars to spend, but we’re getting near to the end of that. Those unable to get in on the housing deal just maxed out their credit cards.

Consumer debt has been going up much faster than consumer income. But what goes up must sooner or later come down, and that may be a real problem in the economy very soon. The future holds lots of debt and lots of bankruptcies.

People are now in hock up to their ears in credit card debt and have tapped out their home equity using it to buy more junk, crap and stuff to cram into their attics, basements, garages and driveways, not to mention their homes.

When the bills come due, people just aren’t going to be able to pay them and the next phase is wide-spread bankruptcies.

Chickens, sooner or later, come home to roost, and there are countless flocks of them getting ready to fly home.

© 2004 Richard Walrath

Richard Walrath is a freelance writer and CAO of Articles and Answers. Visit us online at

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