There is still a Keynesian fallacy that consumer spending drives the economy.  This incorrect line of thought is particularly prevalent around Christmas time.

After Black Friday and Cyber Monday are done, we will hear statistics about how great or how disappointing retail sales were.  If sales meet or exceed expectations, the talking points will be that the economy is still strong because the American consumer is spending money for the holidays.

There is a relationship between consumer spending and the economy.  There is a relationship between consumer spending and our overall living standards.  But we shouldn’t confuse a correlation with causation.  Strong consumer spending doesn’t cause us to have a good economy.  If anything, a good economy leads to strong consumer spending.

You Can’t Consume What Isn’t Produced

You can only consume what is first produced.  We can be sure that the people of Ghana or Bangladesh would love to be lining up at Best Buy to purchase the latest 70-inch television for only a few hundred dollars.  The problem is that most people living in these third-world countries simply can’t afford to buy a 70-inch television.  They are more worried about having clean water, a safe shelter, and food to eat for tomorrow.

The reason Americans, in general, are so wealthy as compared to many other people in the world is because Americans are more productive.  It’s not that Americans necessarily work harder and faster.  It’s that Americans have generations of savings and capital investment that make us more productive.

It isn’t so much technological advancements, although they certainly help.  But those technological advancements are available to anyone in the world.  The problem is that they can’t put them to good use.  You have to have the factories and equipment, along with the knowledge, in order to produce consumer goods.

There may be people in Bangladesh helping to produce televisions, but the capital investment is likely coming from the U.S. and other first-world countries.  The people in third-world countries don’t save a lot of money, and they invest very little, at least comparatively.  If you are worried about where your next meal is coming from, you aren’t going to invest in a factory to build electronics.

Savings and Production

Increases in production come from savings and investment.  When you produce something and don’t consumer something in an equal amount, then the difference is in savings.  This is measured in money.  You can produce any number of goods and services and sell them.  If you save some of the profits, then this can go into investment.  It can be used to build machinery or start a new business.  This is done in order to seek profit in the future by producing more.

It is hard to grasp in today’s world because so many people make their money by producing things that aren’t directly consumed.  An accountant or attorney may be helping a corporation, even though they aren’t the ones making the widgets, but it still may be a necessary function.

There are people who produce services too, which is a sign of a wealthy people.  When you think of athletes, actors, and singers who make a lot of money, it is hard to think that they are producing something.  But that is what they are doing, and they are sometimes producing this entertainment for millions of a people at a time.

The person serving you your food at a restaurant or making your coffee at Starbucks may not be directly producing the food, but it is still production that is meeting demand.  There are many things that Americans consume that are not necessities.  Again, this is a sign of a wealthy society.

Government Interference

The problem we have today is that the government (at all levels) interferes in the marketplace.  This is done through taxation, inflation, borrowing, and regulating.  Most government action discourages savings and investment.  It is actually amazing how much people are still able to save and invest in spite of government interference.  It is amazing that new businesses and innovations still come about as rapidly as they do.

The U.S. has built upon previous savings and investment from generations before for over 200 years.  Even the people in the late 1700s were building upon what was built before them.

If the government weren’t taxing and regulating us so much, we would have even more prosperity than what we have today.  It is actually unimaginable what we might have.

Still, even with the government at all levels taking nearly half of our money and misallocating it, most Americans are still able to go out to eat, go to Starbucks, own a smartphone and a big screen television, and go on vacations.  If some of these things aren’t your cup of tea, maybe you have something else where you spend money, even though you don’t necessarily “need” it.

The fact that Americans are spending as much money for Christmas gifts as in past years is almost meaningless.  This could be because consumers are doing well, but it is just as likely, at least in 2023, that it is because they just aren’t saving much money.  In some cases, people are buying Christmas gifts with debt and no ability to pay off the debt within the next month.

We actually want people to save money and spend less so that we can have greater production in the future. We don’t want to consume our capital, which could actually make us poorer in the future.

For the sake of the American economy and our future living standards, let’s hope that retail sales are down this Christmas season.