ECON 2505, Environmental Econ, sec D-729 Spr2015

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  • “Don’t Expect Consumer Spending to be the Engine of Economic Growth it Once Was
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    Emmons argued that “several powerful trends suggest that American consumers may not be able to serve as the engine of economic growth like they did in the prosperous post-war era. These trends as identified by Emmons are lower wealth, stagnant income, tight credit, fragile confidence, and looming reversal of stimulus. In recent years, household wealth has been declining. The consistent decrease in household wealth has forced some families to restrain from consumer spending. Emmons noted that “the loss of significant amount of wealth and the severe pressure in some households to deleverage their balance sheets (reduce debt) are likely to contribute to restrained consumer spending for some time.”

    In addition, Emmons argued that tighter credit and decreased borrowing are likely explanations that suggest that American consumers may seize to contribute to the growth of the economy through spending. According to Emmons, “consumer lenders either have disappeared altogether or are offering credit on a more restricted basis than before the downturn.” It is important to note that most of the consumer spending before the recession was financed by high debt. However, the inability of financial institutions to relax their credit standards has denied most households easy access to credits. “Standards for mortgage loans have not loosened significantly” (Emmons). The inability of households to get mortgage loans have forced majority of the affected households to spend significant percentage of their income on housing costs. Consequently, these households are subjected to excessive housing cost burden.

    The implication of this is that the affected households have little or no savings to spend on consumer goods. Nevertheless, it is important to note that housing cost burden is exacerbated by stagnant income. As housing cost have been increasing, household income have been stagnated within the last few decades. “Job growth barely matches population growth, while incomes of the typical worker are barely keeping up with inflation” (Emmons). With stagnated income and increased housing cost burden, the affected households will have nothing to spend on consumer goods. This illustration further concurs with Emmons argument that American consumers may desist from contributing to the sustenance of the economy through consumer spending.

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