The Keynesian Myth of Consumer Confidence

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 side.

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 so!

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 (1936).

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)

“To 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 Naive.

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.

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

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

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

then 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.

August 5, 2003

Gary North is the author of Mises on Money. Visit For a free subscription to Gary North’s newsletter on gold, click here.

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