The health of nations
In the rational world, the health of nations is assessed based in large part on consumption trends. If consumption, discretionary income, and spending are rising, this would suggest that the health of an economy is improving. If the opposite is true, this suggests otherwise.
In the rational world, the health of nations is assessed based in large part on consumption trends. In the irrational world, these assessments are often forgotten, or neglected. (Nichole Sobecki/CNN)
Disposable income, the amount left over to a consumer after taxes, needs to be monitored closely. Discretionary income, the more important measure needing regular review, is the amount of net income remaining to consumers after all their necessities are covered.
Regular analysis of consumption, discretionary income, and spending, are key to the process of crafting coherent public policies. Before decisions are made to raise prices of key state services, it becomes essential to assess the impact this will have on consumer discretionary income and spending. For example, if the IMF proposes to a country that it raise the prices of fuel and utilities (e.g. electricity and water), a government must assess the impact of these tariff adjustments on discretionary income.
Since demand for fuel and electricity tend to be inelastic, consumers won’t drastically decrease their consumption when prices rise, they will instead curtail other spending. This decline in spending will likely negatively impact the macro economy, and will need to be properly studied before such tariff increases are implemented.
Yet, in country after country, these consumption assessments are either not done before major decisions are taken on tariff adjustments, or not taken into account. The focus tends to be on getting a government budget right, a state enterprise budget right, even if this detrimentally affects the budgets of consumers.
The reasons for the lack of prior assessments and analytics on discretionary spending varies from country to country. In some developing countries, weak capacity in government, usually in statistical bureaus, is to blame. In other cases, usually middle income countries, the capacity to do this type of regular analysis exists, but it’s either not done on a timely basis, or government officials don’t give it much weight. Countries desperate for bailouts from development financial institutions will often raise tariffs blindly to get the budget relief usually associated to it. The negative impact on consumers and spending are understood, but in the minds of public officials, it cannot be avoided. Then, there is a third group of countries, often very wealthy nations with strong statistical capacity, who do regular reviews of consumer spending. In this group of countries, there usually is a state enterprise that is so powerful that it being in the black is more important than the consequences of lower consumer spending in the macro economy. These tend to be energy companies.
In the rational world, the health of nations is assessed based in large part on consumption trends. In the irrational world, these assessments are often forgotten, or neglected.