Understanding Consumer Spending and the Economy by Dan Mitchell

Almost exactly 14 years ago, the Center for Freedom and Prosperity released a video explaining why consumer spending does not drive the economy.

Here’s John Papola (a.k.a., Dad Saves America) with similar analysis.

Understanding this issue is not merely a matter of recognizing causality (in other words, a strong economy leads to more consumer spending, not the other way around).

It also helps to understand why Keynesian economics is misguided. Simply stated, you don’t increase national income by having the government divert money from capital markets (investment) in order to artificially stimulate consumption (either directly or indirectly).

For those who want to get wonky, this is why the CF&P video explains the difference between gross domestic income (GDI) and gross domestic product (GDP).

Better policy is more likely if lawmakers focus on how national income is earned (GDI) rather than how it is allocated (GDP).

I’ll conclude by stating that it would be nice to debunk Keynesianism once and for all so that it doesn’t come back to life (like a monster in a horror film) whenever politicians are looking for an excuse to spend more money.

P.S. Since we’re now in the holiday shopping season, click here for John Papola’s economically themed Christmas carols.

P.P.S. If you want to enjoy some cartoons about Keynesian economics, click here, here, here, and here. Here’s some clever mockery of Keynesianism. And, since I’m publicizing John’s excellent work, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally enjoyable sequel, which features a boxing match between Keynes and Hayek.