Consumer Spending, not Corporate Tax Cuts, Key to Economic Recovery


Rutgers history professor James Livingston asserts that economic growth is a function of consumer and government spending in his recent article “It’s Consumer Spending, Stupid.” When politicians insist that more incentives for private investors in the form of lower taxes on corporate profits is the way to growth, and polls show most of the public agrees with that, they are wrong, Livingston says. Admitting it is a controversial claim, he makes the following additional points and observations.

During the 20th century, gross domestic product per capita increased over 600% while net business investment declined 70% as a share of GDP. In 1900, virtually 100% of all investment came from businesses, but in 2000 most came from consumer spending on housing and government spending. As business investment slackened, 600% growth was caused by consumer and government spending, according to Mr. Livingston.

In the 1980s, President Reagan tried to spur business investment with tax cuts but that did not work. He quotes former commerce secretary Peter G. Peterson as saying that the Regan corporate tax cuts coincided with “by far the weakest net investment effort in our postwar history.” President George W. Bush’s tax cuts also led to real growth without new investment. Livingston cites the Organization for Economic Cooperation and Development for the proposition that uninvested retained corporate earnings comprise almost 8% of GDP, which he finds staggering given the amount of unemployment in the U.S.

What retained earning have done, Livingston says, is fueled the noteworthy boom-bust manias. He points to the 1920s stock market bubble and great crash, spending on mergers and acquisitions, the dot-com craze, the “shadow banking system” of hedge funds and asset-backed securities, and the housing bubble and subsequent meltdown, as examples.

Livingston concludes that the 99% should not look to the 1% for leadership with regard to generating economic growth: “If our goal is to repair our damaged economy, we should bank on consumer culture ? and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending.”

Page Perry is an Atlanta-based law firm with over 150 years collective experience protecting investor rights and fighting Wall Street greed.