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Macro Malpractice

As the global economy has gone from crisis to crisis in recent years, the cure has become part of the disease. In an era of zero interest rates and quantitative easing, untested medicine is being used to treat the wrong ailment, and the patients – over-leveraged consumers – have been forgotten.

NEW HAVEN – The wrong medicine is being applied to America’s economy. Having misdiagnosed the ailment, policymakers have prescribed untested experimental medicine with potentially grave side effects.

The patient is the American consumer – the world’s biggest by far, but now in the throes of the worst funk since the Great Depression. Recent data on consumer spending in the United States have been terrible. Growth in inflation-adjusted US personal consumption expenditures has just been revised down to 1.5% in the second quarter of 2012, and appears to be on track for a similarly anemic increase in the third quarter.

Worse, these numbers are just the latest in what has now been a four-and-a-half-year-old trend. From the first quarter of 2008 through the second quarter of 2012, annualized growth in real consumption spending has averaged a mere 0.7% – all the more extraordinary when compared with the pre-crisis trend of 3.6% in the decade ending in 2007.

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