Consumers cutting back. Finally.
January 15, 2008 14 Comments
I cannot help but think this is a good thing, especially with all of the debt that American consumers have incurred:
Strong evidence is emerging that consumer spending, a bulwark against recession over the last year even as energy prices surged and the housing market sputtered, has begun to slow sharply at every level of the American economy, from the working class to the wealthy.
The idea that consumer spending must be relied upon as the engine that drives the American (and global, for that matter) economy is dangerous, as it precipitates living beyond one’s means, over-borrowing and a resulting credit crunch, as we are seeing right now.
But somehting will have to replace consumer demand, or our economy will stagnate for years.
Michael Blaine
http://www.rudelystamped.blogspot.com
I don’t think people overspend because they see it as their duty to the economy. The two aren’t really related. The economy does need healthy spending from consumers to maintain the success of businesses that are in turn employing others. While you’re right that the credit card culture of this country may contribute to an ersatz economic boom, when faced with recession, you don’t want consumer to stop spending dramatically.
I did not write (and do not believe) that people spend for any sort of patriotic loyalty to the U.S. economy.
Consumer spending is exactly what drives the economy…that’s kind of the idea of the market. People overspend because they have their priorities messed up. Small amounts of money are blown throughout the day and throughout the week, and those small amounts add up, so that when it comes time to buy a true necessity, a credit card is needed to either pay for the necessity or the aforementioned frivolous buys. At a certain point, though, people realize that the prices are just too high to be worth the cost, and so cease to buy. It’s then up to merchants to lower the prices. Don’t get me wrong though…I think an economic collapse could be a good thing, if only because it would destroy our illusions about a lot of things and force a re-prioritization.
Chris is right, consumers must be relied upon to drive the economy. What else could be?
And I know you didn’t say that, I was kind of joking. But you did imply that relying on consumers for the good of the economy is a bad idea, which I don’t think it is.
Consumer spending does not always result in economic growth in the long term and can lead to volatility that may be more damaging than no growth in consumer spending. If consumers are increasing spending while unemployment is decreasing, wage increases are stagnant, health care costs are increasing, energy costs are increasing, and the savings rate is less than zero, how does that help the economy? Eventually, a bottom falls out, as it has in the mortgage lending industry, and that impacts other areas for the worse (strength of dollar, interest rates, tax revenues, etc.) and eventually results in economic contraction. Better to have less consumer spending earlier on and avoid a crisis the proportion of the mass subprime loan defaults and foreclosures. So yes, I disagree that consumer spending is always good for the economy. The business language that treats increased consumer spending as a positive economic indicator obscures the meaning of increased spending for individual consumers, but that is for another blog entry.
But it’s not spending per se that’s the problem. It’s borrowing.
Elaine, perhaps it might be more instructive to explain what it is that you think drives the economy, or should drive the economy. I agree with Jon, borrowing is the problem. The whole sub-prime mess came about because banks thought they could get away with giving out loans to people who had no business taking out loans in the first place. It’s no surprise that banks would go bankrupt when people end up not having the money to pay back.
I’m also thinking, too, that perhaps you’re subscribing to a much narrower definition of “consumer spending” than one might expect, in which case, the dicussion here would have a bit more agreement.
I’m subscribing to a broad definition of “consumer spending” for these purposes, because over the last 35-years, borrowing has become so much a part of spending.
Consumer spending, as defined by government agencies, currently makes up over 2/3 of the U.S. economy, so the “reliance” of the US economy upon consumer spending is not just an idea, it’s reality. The article claims that consumer spending has been a “bulwark” not because someone said so, but because other economic indicators have been negative (domestic investment, exports, etc.) If you were arguing that determining the health of an economy should be based on something other than consumer spending, I’d agree. I have no problem allowing people to spend or borrow as they please as long as they are willing to face up to the consequences of their actions and not demand the government bail them out for their poor choices.
Or perhaps we should bring back debtors’ prisons…
A major problem with the consumer-driven economy is that it obliterates the citizen, the person.
We Americans are not a society of people, but of consumers, valued only for our ability to keep the economic engine revved up.
It’s alienating, de-humanizing.
Another central problem is the foisting on our young people of education-related debt. I know of no other country in the world that expects its newly-minted university graduates to begin life in debt. This phenemonon is seriously eroding America’s health, and I can’t wait for it be seriously addressed by mainstream politicians and media outlets.
Michael Blaine
http://www.rudelystamped.blogspot.com
It’s not like we consumers, no longer people, aren’t complicit in this. We love having our egos stroked and listening to advertising catering to what we want. I don’t know about you, but most people I come in contact with treat me like a “person”. Merchants will treat you as a “consumer” in that sphere, politicians will treat you like a “voter” — consumption is part of personhood, in fact, its completely dependent on our free will, one of the very things that characterize us as human beings. The only way you’ll be “de-humanized” is if you believe in the Marxist idea that your identity is completely dependent on your participation in the economy. Such a view is, of course, wrong as it ignores much of everyday human behavior.
As for university debt, universities are sitting on hundreds of billions of dollars–they could actually, um, distribute that rather than making middle class families pay the price of their children’s education as well that of other people’s children. Also, we could stop forcing people to think they need to go to college in the first place. Most of those other countries you talk about MB have separate educational tracks students are able to go to university or a technical school. But the universities have figured it out: their perceived quality, and actual price, is based on the name listed on a piece of paper and prices go up as the quality goes down because it has very little to do with education any more.
“We love having our egos stroked and listening to advertising catering to what we want.”
I in fact loathe it. And the older I get, the more ittitating advertising becomes. I find it possibly the most disagreeable aspect of American life.
And, yes, I can think of a country that doesn’t make university education widely accessible, that “tracks” its citizens from an early age: Brazil.
MB
Here are a few more for you: http://en.wikipedia.org/wiki/Dual_education_system