Consumer Spending Will Not Save You

Government stimulus programs depend on macroeconomic theory that was established many decades ago by folks like Keynes. When the government spends money, or gives it to needy individuals, the theory says that the economy as a whole will expand, creating economic growth.

At the microeconomic level, the theory doesn't hold. An individual's choice about where to put dollars they have been given has an enormous effect on the downstream growth prospects for the economy. As I've written here before, the individual could choose to spend the money on inefficiently-produced goods and services, in which case they have extended the misallocation of resources that will tend to extend the recession, and does not provide a foundation for future growth.

In addition, the character of the individual's acquisitions with the stimulus dollars can have an important effect on growth. Again, the choice can create growth or destroy it, depending on how it is spent.

Let us image Joe Smith, lucky recipient of $100 of stimulus spending. He doesn't have to pay it back, and he can spend it any way he wants. Some of his choices:

∙ 8 bottles of Jack Daniels whiskey
∙ 40 gallons of gasoline
∙ new air filter, oil filter, oil change, and other engine maintenance on his car
∙ repay loan to his brother, who is an accountant
∙ change or add working fluid in his home HVAC system

What is the rate of return on these options? There is a personal component, and a societal component. In some cases, Joe himself will make money, in others society makes money. What I would suggest to Joe is that, assuming that his HVAC system is a bit older or hasn't serviced in a while, is that an investment in bringing the HVAC system up to full working order could repay him as much as 20% per month on his $100 investment. The whiskey might have a negative return (showing up drunk to work would be bad...), repaying his brother might not earn anything but goodwill or it might restore a great relationship, and the gasoline is just another living expense.

From the Keynesian perspective, the $100 has the same effect on the national economy regardless what Joe does with it. Obviously, this shorthand theory is incorrect. It matters a great deal where stimulus money is spent, and individual choices count heavily in the return on spending.

Hence the title of this article: Consumer spending from stimulus money, alone, is unlikely to generate economic growth, because decisions will be made to put some of the money in places that don't generate a return. Stimulus money carefully applied to areas where investments are made with high rates of return will generate economic growth.

From the investor's perspective, what should influence your perception of the future GDP growth rate is whether stimulus money is aligned with sharper investment sense. Money given freely to unemployed will be spent in ways that provide no return on capital. Money given to decrease energy spending will provide a return on capital. Money given in ways that boost the interest that individuals have in making good investments will also provide a return on capital.