The Keynesian Myth of Consumer Confidence

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In July, consumer confidence fell like a stone. The Conference Board,
which somehow gets people to pay for its surveys, announced that
consumer confidence in July fell by seven percentage points, to
76.6, down from 83.5 in June. That drop, I assure you, is a major
hit. One-month shifts of this magnitude are rare.

The Expectations Index fell from 96.4 to 86.4. I have no idea how
the Expectations Index differs from the Consumer Confidence Index,
but it sure sounds bad, doesn’t it? Down, down, down.

When numbers move this much, someone at the numbers-issuing organization
feels compelled to say something about causation. This was the case
at the Conference Board.

“The rising
level of unemployment and sentiment that a turnaround in labor
market conditions is not around the corner have contributed to
deflating consumers’ spirits this month,” says Lynn Franco, Director
of The Conference Board’s Consumer Research Center. “Expectations
are likely to remain weak until the job market becomes more favorable.”

Readers of this press release are supposed to think this is a profound
insight, and perhaps some readers do. I don’t.

Let’s begin with what ought to be obvious: the American economy
went into recession in March, 2001. The country has lost three million
jobs. The recovery officially began in November, 2001. Jobs have
continued to disappear despite the official recovery. Unemployment
in May was bad, worse than it had been a year before. Unemployment
in June was bad, worse than it had been the
year before
. But in July, consumer confidence collapsed.

Don’t tell me it’s the job market that produced a 7-point decline
in one month — 10 in the other index. Grab some other economic
explanation out of the air. There are always plenty of them floating
around, like pollen in spring.

Mr. or Miss or Mrs. or Dr. Franco — Lynn is a gender-neutral name
— is just doing his/her job: providing newspaper reporters with
something to write. This keeps reporters occupied and off the welfare
rolls — a worthy goal, indeed. But it does not add to our understanding
of consumer confidence and its effects on the economy. Frankly,
nothing I have ever read about consumer confidence has added to
my understanding. The entire concept is on the misunderstanding

There are lots of perfectly good reasons to worry about the U.S.
economy. The rate of consumer confidence isn’t one of them. Let
me explain.


At some point, your teenager gets your credit card, “for emergencies.”
Usually, this is when you send him/her off to college — a four-year
time of partying that will cost you between $40,000 and $140,000
in after-tax capital per teenager. Let’s assume that your teenager
remains confident about the future. And why not? You have handed
over the credit card and have also guaranteed him/her four more
years of financial support: tuition, room, board, books, and boola-boola.
This stream of income will continue for as long as he/she maintains
a C average in some academic major, which in (say) education can
be done by anyone who can fog a mirror. Consumer confidence? I guess

I offer two scenarios. First, your teenager scholar somehow gets
a part-time job on campus and starts saving half the after-tax paycheck.
Second, your teenage scholar doesn’t get a job, but starts spending
$1,000 a month with your credit card. Which scenario do you prefer?

The Keynesian economist, who follows the economic theory of John
Maynard (Candy) Keynes, who had no children, will do his best to
persuade the public that scenario #2 is best for the economy. Because
he is a macroeconomist, studying only the Big Picture, he really
doesn’t care what happens to you. For him, your opinions are irrelevant
until such time as you take back your credit card.

If, in a moment of enlightened self-interest, you and other similarly
afflicted parents call your buoyantly confident teenage consumers
and bring the unwelcome news that you have just cancelled the line
of credit, the Keynesian economist will begin to issue warnings.
“Consumer confidence falls.” “Recession ahead.” “Falling employment
looms.” “Economic slowdown beckons.” And so forth.

Let’s say that the experience of having the line of credit cut off
creates a new sense of responsibility in your teenager. He/she begins
to think about the reality of a world without debt. He/she becomes
future-oriented overnight. (Understand, I’m offering all this strictly
as a hypothetical example.) He/she goes out to get a job, whereupon
he/she starts investing 50% of the after-tax income.

Absolute panic now strikes the Keynesian economist. “Consumer confidence
disappears.” “Depression ahead.” “Starving mobs of unemployed workers
just around the corner.” “Economic collapse imminent.”

Here is the Keynesian’s problem: he thinks that immediate consumption
drives the economy. Anything that threatens to reduce immediate
consumption therefore threatens the economy. When people stop buying
consumer goods on credit, this worries the Keynesian economist.
When they use part of their income to pay off existing debt, this
terrifies the Keynesian economist. When they start saving part of
their income, having lowered their debt to zero, this reduces the
Keynesian economist to Chicken Little. If he had any money to invest,
which academic economists rarely do, he would call his broker and
tell him to short sky futures.

You think I’m exaggerating. Me? Exaggerate? Let’s hear from the
Master himself, in his most famous book, The
General Theory of Employment, Interest, and Money

Pyramid-building, earthquakes, even wars may serve to increase
wealth, if the education of our statesmen on the principles of
the classical economics stands in the way of anything better.
(p. 129)

If the Treasury were to fill old bottles with banknotes, bury
them at suitable depths in disused coalmines which are then filled
up to the surface with town rubbish, and leave it to private enterprise
on well-tried principles of laissez-faire to dig the notes up
again . . . there need be no more unemployment and with the help
of the repercussions, the real income of the community, and its
capital wealth also, would probably become a good deal greater
than it actually is. It would, indeed, be more sensible to build
houses and the like; but if there are political and practical
difficulties in the way of this, the above would be better than
nothing. (p. 129)

dig holes in the ground,” paid for out of savings, will increase,
not only employment, but the real national dividend of useful
goods and services. (p. 220)

The world economy, from the 1930’s until today, has rested on the
economic theories of this man. The result has been the vast expansion
of taxation and regulation, accompanying the depreciation of every
national currency. He, unique among economists, wrote his own epitaph
and the epitaph of every society that embraces his principles, in
the final paragraph of his magnum opus.

But apart from this contemporary mood, the ideas of economists
and political philosophers, both when they are right and when
they are wrong, are more powerful than is commonly understood.
Indeed the world is ruled by little else. Practical men, who believe
themselves to be quite exempt from any intellectual influences,
are usually the slaves of some defunct economist. Madmen in authority,
who hear voices in the air, are distilling their frenzy from some
academic scribbler of a few years back. I am sure that the power
of vested interests is vastly exaggerated compared with the gradual
encroachment of ideas. Not, indeed, immediately, but after a certain
interval; for in the field of economic and political philosophy
there are not many who are influenced by new theories after they
are twenty-five or thirty years of age, so that the ideas which
civil servants and politicians and even agitators apply to current
events are not likely to be the newest. But, soon or late, it
is ideas, not vested interests, which are dangerous for good or
evil. (p. 383)


I presume that you do not make your living by systematically wandering
through your town, looking for pay phones from which you extract
coins from the coin return slots. You will therefore understand
me when I say that money gets spent. That’s what money is for: spending.
The amount of currency that stays unused in hoards is minimal. Mattresses
are not the primary resting places of money. Most money is digital.

The question is: Where does a spender allocate his expenditures?
The largest single component goes to fund governments: about 42%.

Government regulation adds another 14%. This is up from 4% in 1974. We
pay for this as a component in consumer prices. It’s a benefit only
to the extent that regulation provides benefits. I don’t see that
the additional 10 percentage points imposed since 1974 have made
me more prosperous.

In the United States, between 12% and 14.5% goes for debt service
and repayment

Most of the remainder goes for present consumption.

About 3.5% goes for personal saving. This figure was 1%
in the 4th quarter of 2001.

Think about this. The government gets its share of your economic
output — the lion’s share — and you get to decide what to do with
whatever is left over. You will pay your taxes. You will abide by
those regulations. You will repay those debts. You will pay those
insurance premiums. You will pay those utility bills. You will shop
at Wal-Mart or some higher price competitor. Your discretionary
income is comparatively small.


What we have seen since 1913 is the build-up of consumer confidence
in the government. In 1913, the year that the Federal Reserve Act
was signed into law, prices were about 5% of what they are today.
See for yourself: the inflation calculator on the Web
site of the U.S. Bureau of Labor Statistics

The income tax extracted almost nothing. Take a look at Form 1040 in 1913,
the first year of the income tax. Show this to your adult children
if you want to let them know where their inheritance went (along
with their college bills). Notice that there was a personal exemption
of $3,000 ($55,666 in today’s money) in a nation in which average
annual income was under $1,000. A handful of taxpayers paid 1% to
7% on anything over $3,000.

There was no Social Security or Medicare.

There was almost no regulation of the economy.

Today, we read reports about the rise and fall of consumer confidence.
But consumer confidence or lack thereof is placed in an economy
in which discretionary spending is so marginal as to be almost irrelevant.

Consumer confidence rises or falls within constraints so tight that
the typical consumer might as well be wearing a straight jacket.
The media’s reports on consumer confidence could easily be imitated
in the monthly survey of inmate opinion in a mental institution.
“Inmates lost confidence in July, down seven points since June.
Analysts said this was because of reduced confidence in the Moscow
campaign among one-third of the inmates, who think they’re Napoleon.”

Decade after decade, we see the relentless growth of government.
This expansion may be reversed marginally for very brief periods,
but then a recession, a war, or both will put it back on track.
Voters call on the government to Do Something, and what the government
does is to increase spending, increase regulation, and increase
promises (unfunded).

This does not change. It is a universal phenomenon. Any discussion
of consumer confidence takes place only within the tightening straight
jacket of the State. Consumer confidence? The inmates in this case
are residents of the John Maynard Keynes Hospital for the Incurably

I am not speaking of the black market. Here, entrepreneurs provide
services for cash. Taxes are not paid. Regulations are not adhered
to. Consumer wealth therefore increases. This allocation of income
does not appear in official graphs and pie charts.


If you thought you might lose your job in three months, what would
you do? Here are a few options.

  1. Work longer
    hours for the same pay.
  2. Accept a
    pay cut.
  3. Take a second,
    part-time job.
  4. Increase
    your savings rate.
  5. Tell your
    college-age child to get the degree by exam.
  6. Cut your
    spending on entertainment.
  7. Skip a vacation.
  8. Go to night

Tell me why they are bad for the economy. If your answers are

  1. Sellers
    of the services you’re buying now will be hurt;
  2. Your competitors
    will be hurt;
  3. Less money
    will flow into the economy;

you are wrapped tightly in the Keynesian straight jacket.

Sellers of services that people don’t want to buy ought to be hurt.
That’s consumer sovereignty at work. Competitors should be hurt
if you can do the work better. The same amount of money will flow
into the economy; it will just flow into marginally different channels.
It will be spent.

What this country needs is a huge reduction in consumer confidence.
This might lead to repairmen who show up on time, trade unions that
consent to lower wages, colleges that reduce their tuition, government
clerks who work faster, and professional basketball stars who play
for a mere three million dollars a year.

I’m dreaming, of course. A drastic fall in consumer confidence would
lead to more money being issued by the Federal Reserve System, more
cries for make-work government boondoggles, higher government deficits
“to get America moving again,” longer periods for state unemployment
insurance benefits, and Hillary Clinton.

Consumer confidence is meaningful only with respect to whatever
it is that the consumer has confidence in. If he has confidence
in the State as the supplier of safety nets, then falling consumer
confidence in the economy implies rising consumer confidence in
the State. This has been the situation all over the West since 1932.
Only in places like China and Singapore and Taiwan has consumer
confidence begun to mean confidence in personal responsibility and
increased entrepreneurship. This is why Asia is now replacing the
West in its ability to produce.


Imitate the Asians. Work harder, longer, and above all, cheaper.
Or become an employer. Buy capital, especially capital that is not
facing direct competition from Asians. Become a confident consumer
because you have increased your holdings of productive capital.
Become a confident consumer because you have found a niche market
in which you have an advantage. In short, become a confident consumer
because you have become a competitive producer.

That’s the only consumer confidence that matters. Anything else
is a Keynesian illusion.

5, 2003

North is the author of Mises
on Money
. Visit
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