Bernanke Tells Students We Need More Consumption

In his series of lectures entitled The Federal Reserve and the Financial Crisis he is delivering at Georgetown, Chairman of the Federal Reserve, Ben Bernanke keeps pitching them. In his first lecture, "The Origins and Mission of the Federal Reserve," he explained his views on the nature of central banking and his thoughts on the gold standard (he does not like the proposition).

In his second lecture, "The Federal Reserve after World War II" delivered Thursday, Bernanke said that U.S. households need to spend more on consumption in order to continue economic recovery.

“Consumer spending is not recovered, it’s still quite weak relative to where it was before the crisis. In terms of debt and consumption and so on we’re still way low relative to the patterns before."

This is the sort of analysis that is natural for people who mistake GDP for economic activity. Certainly increased consumption spending will boost GDP, but more consumption will not provide for sustained recovery. After the initial round of consumption, where will we get more consumer goods to consume again? Only if they have been produced. The larger the percentage of our income we spend on consumption, the less we save and invest and the lower our productivity.

After a period of capital consumption due to malinvestment encouraged by the central bank, the only way for the economy to get back on its way to economic expansion is via capital accumulation. That requires more saving not less, which means less consumption not more. Perhaps one of the reasons we got into the crisis is that people took on too much debt and engaged in too much consumption, while the Fed bank rolled the whole thing. If so, getting back to pre-crisis levels of debt and consumption is the last thing we need right now.