Between 2005 and 2011, home construction in America plunged more than 60% because builders found it increasingly hard to make sales. At first the damage was mainly limited to the construction industry. But over time the slump spread into just about every part of the economy, with consumer spending falling across the board.

But why should a fall in home construction mean empty stores in the shopping malls? After all, malls are places where families, not builders, do their shopping.

The answer is that lower spending on construction led to lower incomes throughout the economy; people who had been employed either directly in construction, producing goods and services builders need (like wallboard), or in producing goods and services new homeowners need (like new furniture), either lost their jobs or were forced to take pay cuts. And as incomes fell, so did spending by consumers. This example illustrates our tenth principle:

One person’s spending is another person’s income.

In a market economy, people make a living selling things—including their labor—to other people. If some group in the economy decides, for whatever reason, to spend more, the income of other groups will rise. If some group decides to spend less, the income of other groups will fall.

Because one person’s spending is another person’s income, a chain reaction of changes in spending behavior tends to have repercussions that spread through the economy. For example, a cut in business investment spending, like the one that happened in 2008, leads to reduced family incomes; families respond by reducing consumer spending; this leads to another round of income cuts; and so on. These repercussions play an important role in our understanding of recessions and recoveries.