WASHINGTON (AP) – Consumers spent at a lackluster rate in November as their incomes barely grew, suggesting that U.S. households may struggle to sustain their spending into 2012.

The Commerce Department says consumer spending rose just 0.1 percent in November, matching the modest October increase. Incomes also rose 0.1 percent. That was the weakest showing since a 0.1 percent decline in August.

Both the spending and income gains fell below expectations. Economists have said that solid increases in spending could boost economic growth in the final three months of what has been a disappointing year.

While the economy remains vulnerable to threats, particularly a recession inEurope, the job market has improved, lifting hopes for next year.

Read more here.

On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to discuss the latest consumer spending numbers, China’s push to corner the market on rare earth minerals, and Solyndra as the perfect example of Obamanomics.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

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Consumers spent less on autos, clothing and furniture to leave retail sales unchanged in August.

The lack of growth suggests households became more cautious during wild stock market fluctuations and increased fears about the economy.

The Commerce Department also said Wednesday that retail sales were slightly weaker in July than first thought. They rose just 0.3 percent, down from the initial reading of 0.5 percent.

Auto sales fell 0.3 percent in August. Sales at clothing stores declined 0.7 percent. Gasoline sales rose.

Analysts said Hurricane Irene likely disrupted sales in late August along most of the East Coast.

Stocks were trading higher when the market opened but fell later on in morning trading. The Dow Jones industrial average dropped more than 60 points.

Consumer spending is important because it accounts for 70 percent of U.S. economic activity.

The overall economy expanded at an annual rate of just 0.7 percent in the first six months of this year, the slowest growth since the recession ended two years ago. Employers added no net jobs in August, and the unemployment rate stayed at 9.1 percent.

Read the whole thing here. Again, making the weather the fall guy. That doesn’t likely stack up; in the run-up to the hurricane, consumers stocked up on water, food, batteries, generators, etc. At most, the hurricane shifted spending from certain categories to others. The August number is important, because it contains the critical “back-to-school” shopping boost. It bodes ill for the holiday shopping season.

Our so-called brilliant, Nobel Prize-winning President, for months, has exhorted American businesses to hire employees and invest – as if wishing for an economic recovery would make it so.  Recently, however, Democrat and mega-businessman Steve Wynn told the country – and Obama, if he was listening – why cash rich business is not hiring and investing.  According to Wynn, “this administration is the greatest wet blanket to business, and progress and job creation in my lifetime . . . those of us who have business opportunities and the capital to do it are going to sit in fear of the President . . .”

President Calvin Coolidge used to say, “The chief business of the American people is business.”  Even so, business doesn’t invest just for fun – they invest for profit – and they don’t invest if they think the risk of not making an acceptable profit is too high.  I wrote “acceptable” because business weighs the fact that even if they make money, it will be taxed.  As such, a business must decide not only if it will be able to make a profit, but will the profit be so much that it would be worth the trouble/risk after taking taxes into consideration.  Keep in mind business knows that it carries all of the downside risk and that government will take a good portion of any upside.  If at some point the risk gets too high, business investment and spending is stalled.

Today, Steve Wynn, and much of American business, believes that the risk of not making a decent profit is too high for several reasons.  For instance, business doesn’t see sufficient consumer demand – so they don’t stock their shelves or expand production as they otherwise might.  Regulations and the threat of more regulations are so high that they hold back money to pay for future costs.  Taxes and the threat of higher taxes are also high – and that too causes business to hold back spending in order to pay those future taxes.  As a result, business investment and spending is stalled.

All of which brings us to the early 1920’s.  Back then government created unacceptable risk because it was taking too much of the upside.  Democrats under Woodrow Wilson instituted the income tax in 1913 with a top rate of 7%.  Just over 3 years later it was 77%.  In other words, the federal government was telling Capitalists, “You risk the downside and, if you are lucky enough to make money, on that last, top dollar, we will take 77%.”  Not surprisingly, by 1918, we were in a deep recession because of a reduction in war spending and the high tax rates.  By the early 1920’s, poor consumer demand and high tax rates caused investors to believe that there was too much risk for them to spend or invest very much.

So what did they do with their money?  They parked huge amounts of it in tax-free, risk free, government bonds.  Incredibly, rather than risk their money, the rich were being paid tax-free interest by the government.  Also not surprisingly, government revenues lagged because business transactions and profits had been greatly reduced by the high tax rates.

Treasury Secretary and Republican Andrew Mellon saw all of that.  It confirmed what he knew; namely that the “history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business.”

Mellon and his President, Calvin Coolidge, wanted the rich and business to take risks again.  To get them to do that, Mellon knew that the risks had to be reduced enough to jump start investment – and like a boulder at rest, Mellon knew it would take a big push to get the investment ball rolling.  To do that, they had government lower income tax rates to 25%.

With that, the rich and business decided that, while it wasn’t normally worth taking risks during a recession with those high tax rates, the new rate was sufficiently low enough to take a risk. They believed that they had the opportunity to keep a sufficient amount of the profits they might make.  Sure enough, they took risks, they invested and the Roaring 20’s ensued. The subsequent surge in risk-taking created the greatest period of innovation in American history and federal government revenues jumped over 60% because profits soared.

Today, the risk is too high for American business and the rich.  They have withdrawn their productive capital from the market place. Government spending, as the failed stimulus bill proves, only increases risk because it is temporary and leads to demands for higher taxes.

The only thing government can do is to truly change today’s psychology of risk.  The ONLY way to do that is to lower the costs of regulations and the rate of taxes – not temporarily and not just a little – but as far as the eye can see and substantially.  They must do it enough to convince business to take risks again – just like Coolidge and Mellon did in the early 1920’s.

I wasn’t unhappy because the interview was biased to the left. From what I could tell, both the host and the guest were straight shooters. Indeed, they spent some time speculating that the economy’s weak performance was bad news for Obama.

What irked me was the implicit Keynesian thinking in the interview. Both of them kept talking about how the economy would have been weaker in the absence of government spending, and they fretted that “austerity” in Washington could further slow the economy in the future.

This was especially frustrating for me since I’ve spent years trying to get people to understand that money doesn’t disappear if it’s not spent by government. I repeatedly explain that less government means more money left in the private sector, where it is more likely to create jobs and generate wealth.

In recent years, though, I’ve begun to realize that many people are accidentally sympathetic to the Keynesian government-spending-is-stimulus approach. They mistakenly think the theory makes sense because they look at GDP, which measures how national income is spent. They’d be much less prone to shoddy analysis if they instead focused on how national income is earned.

This should be at least somewhat intuitive, because we all understand that economic growth occurs when there is an increase in things that make up national income, such as wages, small business income, and corporate profits.

But as I listened to the interview, I began to wonder whether more people would understand if I used the example of a household.

Let’s illustrate by imagining a middle-class household with $50,000 of expenses and $50,000 of income. I’m just making up numbers, so I’m not pretending this is an “average” household, but that doesn’t matter for this analysis anyway.

Expenses                                                        Income

Mortgage           $15,000                         Wages                $40,000

Utilities               $10,000                        Bank Interest       $1,000

Food                     $5,000                        Rental Income      $8,000

Taxes                  $10,000                        Dividends             $1,000

Clothing               $2,000

Health Care         $3,000

Other                    $5,000

The analogy isn’t perfect, of course, but think of this household as being the economy. In this simplified example, the household’s expenses are akin to the way the government measures GDP. It shows how income is allocated. But instead of measuring how much national income goes to categories such as consumption, investment, and government spending, we’re showing how much household income goes to things like housing, food, and utilities.

The income side of the household, as you might expect, is like the government’s national income calculations. But instead of looking at broad measures of things such wages, small business income, and corporate profits, we’re narrowing our focus to one household’s income.

Now let’s modify this example to understand why Keynesian economics doesn’t make sense. Assume that expenses suddenly jumped for our household by $5,000.

Maybe the family has moved to a bigger house. Maybe they’ve decided to eat steak every night. But since I’m a cranky libertarian, let’s assume Obama has imposed a European-style 20 percent VAT and the tax burden has increased.

Faced with this higher expense, the household – especially in the long run – will have to reduce other spending. Let’s assume that the income side has stayed the same but that household expenses now look like this.

Expenses

Mortgage           $15,000

Utilities                 $9,000        (down by $1,000)

Food                     $4,000        (down by $1,000)

Taxes                  $15,000        (up by $5,000)

Clothing               $2,000

Health Care         $3,000

Other                    $2,000        (down by $3,000)

Now let’s return to where we started and imagine how a financial journalist, applying the same approach used for GDP analysis,  would cover a news report about this household’s budget.

This journalist would tell us that the household’s total spending stayed steady thanks to a big increase in tax payments, which compensated for falling demand for utilities, food, and other spending.

From a household perspective, we instinctively recoil from this kind of sloppy analysis. Indeed, we probably are thinking, “WTF, spending for other categories – things that actually make my life better – are down because the tax burden increased!!!”

But this is exactly how we should be reacting when financial journalists (and other dummies) tell us that government outlays are helping to prop up total spending in the economy.

The moral of the story is that government is capable of redistributing how national income is spent, but it isn’t a vehicle for increasing national income. Indeed, the academic evidence clearly shows the opposite to be true.

Let’s conclude by briefly explaining how journalists and others should be looking at economic numbers. And the household analogy, once again, will be quite helpful.

It’s presumably obvious that higher income is the best thing for our hypothetical family. A new job, a raise, better investments, an increase in rental income. Any or all of these developments would be welcome because they mean higher living standards and a better life. In other words, more household spending is a natural consequence of more income.

Similarly, the best thing for the economy is more national income. More wages, higher profits, increased small business income. Any or all of these developments would be welcome because we would have more money to spend as we see fit to enjoy a better life. This higher spending would then show up in the data as higher GDP, but the key things to understand is that the increase in GDP is a natural result of more national income.

Simply stated, national income is the horse and GDP is the cart. This video elaborates on this topic, and watching it may be more enjoyable that reading my analysis.

On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to talk about the latest consumer spending and savings numbers that came out this morning. Then Congressman Sean Duffy discusses debt ceiling negotiations, Democrat calls for tax hikes, and Obama’s overreach on Libya.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

Consumers Pulling Back on Spending as Inflation Builds
Obama Tries to Salvage Debt Talks as Party Leaders Bicker Over Meaning of ‘Tax Hike’
Debt Ceiling Negotiations Break Down Over Taxes
Medicare dominates Duffy’s town hall chat
Lawmakers send Obama message of discontent on Libya
Congressman Sean Duffy

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The economy slowed sharply in the first three months of the year as high gas prices cut into consumer spending, bad weather delayed construction projects and the federal government slashed defense spending by the most in six years.

The Commerce Department said Thursday that the economy grew at a 1.8 percent annual rate in the January-March quarter. That was weaker than the 3.1 percent growth rate for the October-December quarter. And it was the worst showing since last spring when the European debt crisis slowed growth to a 1.7 percent pace.

Federal Reserve Chairman Ben Bernanke and other economists say the slowdown last quarter is a temporary setback. They generally agree that gas prices will stabilize and the economy will grow at a 3 percent pace in each of the next three quarters.

But gas prices are still going up. The national average on Thursday was $3.88 a gallon, an increase of 30 cents from a month ago when the first quarter ended.

An inflation gauge in the report showed consumer prices rose last quarter at the fastest pace in nearly three years, with most of the increase coming from higher fuel costs.

Rising gas prices are draining most of the extra money that Americans are receiving this year from a Social Security payroll tax cut.

In the January-March quarter, consumers boosted spending at a 2.7 percent pace. That was down from a 4 percent pace in the prior quarter and was the weakest pace since last summer. Consumer spending is important because it accounts for roughly 70 percent of overall economic activity.

Read the whole thing here. Keep in mind, the first quarter also saw the Federal Reserve pumping hundreds of billions into the markets. It certainly helped Wall Street. The rest of us…not so much.