Investor CAFÉ

Skousen CAFE: No. 1 Mistake by the Media

The media reported last week that real income for Americans fell sharply, largely due to the tax increase passed by Congress on Jan. 1.

But then reporters gave their spin. One from Marketwatch reported, “Worst income in years doesn’t stop spending.” He added that consumer spending is all that matters because it represents “70% of the economy.”

If I were paid every time a reporter cited that erroneous information, I think I would be a millionaire.

The media simply does not understand Econ 101. Consumer spending represents 70% of Gross Domestic Product (GDP), but GDP measures only final output, not total spending at all stages of production. GDP deliberately leaves out intermediate spending.

I’ve written extensively on this error in my various books, such as “The Structure of Production” (New York University Press) and “Economic Logic” (Capital Press). I encourage you to read an article I wrote recently on the subject.

Based on my calculations of total spending at all stages of production (known as Gross Domestic Expenditures or GDE), consumer spending only represents about 30% of the economy, or total spending. It turns out that gross business investment is much bigger and more important than consumer spending.

Yet the media constantly promotes the idea that the key to economic growth is more consumer spending. The following funny video from an Australian firm addresses the situation and only takes a few minutes to watch:

Speaking and Information Gathering This Week

I am speaking and hearing from other investment experts this week on a cruise aboard the Royal Caribbean “Freedom of the Seas,” sponsored by the Real Estate Guys. Peter Schiff, Robert Murphy and I are among the featured speakers. Most of my family members are accompanying me. Watch for a report about what I learned in next week’s e-letter.

You Blew It! Federal Workers Living Paycheck to Paycheck

“A lot of our people live paycheck to paycheck.” — John Kelshaw, IRS official

Now that the “sequester” cuts in government spending are kicking in, the media is reporting possible layoffs among federal workers.

Laura Zayner, a senior officer with the U.S. Department of Homeland Security at Chicago’s O’Hare Airport, was among 400 federal workers facing “possible” furloughs who came to Washington last week to lobby Congress.

“We consider the furlough a slap in the face. We take it personally,” Zayner said. “We are not picking sides, Democrats or Republicans. But we want them to do their jobs and stop the cuts.”

John Kelshaw, who works with the Internal Revenue Service (IRS), came to town from New Jersey. He and a few other federal workers met with Republican Rep. John Runyan.

“We told him that a lot of our people live paycheck to paycheck. We said, ‘Give us a break,’” Kelshaw said.

First of all, we will see if any real layoffs take place. It all may be scare mongering.

Second, all workers, whether they are employed in the private or public sector, should avoid living “paycheck to paycheck.” Studies show that EVERY household wastes 10% or more of its salary or income on unnecessary expenditures or by not taking the time to shop for better prices. It’s all a matter of proper budgeting.

One suggestion my wife and I have used in our personal finance courses we teach at college is simply writing down all expenditures and seeing where the money goes. That alone will cause heads of households to think twice about x, y or z expenditure, and to consider carefully whether they really need something or not.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

In liberty, AEIOU,

Mark Skousen
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