Monday, February 2, 2009

Feeling Poorer? Personal Income and Outlays December 2008

BEA just released December numbers for disposable personal income.

Personal income decreased $25.3 billion, or 0.2 percent, and disposable personal
income (DPI)decreased $25.1 billion, or 0.2 percent, in December, according to
the Bureau of Economic Analysis.

Is this good news? Maybe, when you look at what happened in November.

In November,personal income decreased $44.0 billion, or 0.4 percent, DPI
decreased $33.9 billion, or 0.3 percent, and PCE decreased $77.8 billion, or 0.8
percent, based on revised estimates.
Why is disposable income important?

Well, one of the most fundamental and strongest relationships in economics has to do with income and consumption. This is the consumption function which we all learned way back when in into economics.

It basically states that the more money you have, the more money you will spend. Pretty self-explanatory.

So if the DPI decreased by $25 billion in December that means that your average American could have spent $81 fewer dollars this month, but did not. Which means that businesses need less people, so more are unemployed, which reduces the DPI further, which leads to more layoffs etc.

There are a couple of things that the government can do right away to increase DPI (theoretically).

1. One is to lower taxes. Fewer taxes means that the average consumer would have more money in his pocket to buy things. This may not work simply because people who have more money may choose to save this money rather than spend it. Compared with other investment option available to the average person right now, the best way to save money may be to pay down debt. Deleveraging is not only for corporations.

2. Government transfer payments (unemployment, etc.) The government gives money to people who in turn spend it. Again the problem might be that people save the money rather than spend it.

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