Salim Furth, Ph.D
December 30, 2013
In a throwback to the economic policy and theory of the 1950s, President Obama in a recent speech blamed the rich for concentrating wealth and spending too little on consumption:
Concentrated wealth at the top is less likely to result in the kind of broadly based consumer spending that drives our economy.
The President apparently believes that consumer spending, rather than savings and investment, drives economic growth. But, as this chart shows, personal consumption is at a post-war high as a share of national expenditure. If consumer spending really did drive the economy, it would be booming.
All that consumption comes at the expense of net investment, which shows a clear downward trend since the 1950s. Net savings tracks investment closely.
It’s probably true that, all else equal, rising income inequality lowers consumption a little. Clearly, therefore, income inequality is not causing these major trends: There are much stronger forces in the economy. The President’s theory does not account for the basic macroeconomic facts.