Drop in consumer spending has merits
Is it really so bad that consumer confidence continues to erode? Commentator Amity Shlaes says that if consumers aren't spending, then they're saving, investing or beefing up that college fund, and that can be a good thing.
Amity Shlaes (marketplace)
More on The Economy, Retail, America's Financial Crisis
TEXT OF COMMENTARY
Kai Ryssdal: Take that retail sales number from earlier in the broadcast, a record drop of almost 3 percent last month; add it to a microscopic uptick in consumer confidence; and what you get is a pretty solid case that we're all going to keep our wallets right there in our pockets. In an economy that's so dependent on you and me buying stuff, that's bad news. Or is it? Here's commentator Amity Shlaes.
Amity Shlaes: Consumers rule the economic world. That idea comes from the father of modern economics, John Maynard Keynes. If consumers are grumpy, markets get sour. Politicians monitor consumers like hawks. And recovery? It's all about the consumer too. If the consumer is unhappy, the recovery won't come.
That's why we have so many stimulus packages nowadays. Giving shoppers a little cash is supposed to be like giving espresso to the sleepy. They instantly perk up and shop. Then the stores turn around and buy more. Pretty soon the economy is humming again.
But maybe Keynes has it backwards. Maybe Washington does too. Maybe, it's good news that consumers aren't spending. It shows they wised up about all the bling. They're doing something better with their money. Like saving it. Putting it in the college fund. Or investing it in companies that hire workers. That brings recovery too.
And after all, that espresso doesn't always work. It didn't last summer. President Bush's stimulus package failed to make people spend. They saved, instead. That cautious behavior would have made sense to another economist -- Milton Friedman. Friedman believed that consumers think in the long term. They don't spend on a moment's notice, even when caffeinated. They base their outlays on what they expect to earn over a lifetime. If the future starts to look darker, they keep the dollars in the wallet.
Friedman's theory has a technical name -- the Permanent Income Hypothesis. But it's just common sense. People are thinking they may never get the price they once expected for that condo. At least, not in their lifetime. And they could be right.
So when those confidence numbers are low, remember. Bad can be good. A wise consumer can be good for the economy. And as for recoveries, we'll take ours without the coffee.
Ryssdal: Amity Shlaes is a senior fellow at the Council on Foreign Relations. She's also the author of "The Forgotten Man," a history of the Great Depression.
Comments
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From FL, 11/17/2008
We should elect Bush again, in that way he'll fix all our problems: maybe a third war will spark some more business for Halliburton and it will hire all the unemployed. Those of us who's retirements went bust and who's homes prices dropped below the price we paid can probably beg for money from the Saudis, Iranians, Russians, or Venezuelan governments which are now rich in petro-dollars.
11/15/2008
Ms. Shlaes should go back to school and study Keynes and return Friedman's texts to the shelves. Ms. Shlaes should join a reading group dedicated to reading other authors, including Krugman.
Keynes diagnosed that people don't spend when they are worrying about tomorrow. Government spending thus must be used to promote individual and corporate transactions by creating a sense of confidence that tomorrow will come.
The problem now is that the failed policies of Friedman, Reagan Greenspan, etc. have left the cupboards bare - the consumer is deeply in debt and cannot spend, the government's monetary tools were squandered on tax cuts for the wealthy and two wars, and the only tools left to prime the economic pump are fiscal. Robert Reich suggests fiscal expenditures on infrastructure promoting jobs and further investment. Sounds like a smart idea to me.
In the meantime, Ms Shlaes should be aware that the "choice" offered to consumers by Reaganomics an inherent contradiction that is neatly summed up by paraphrasing Anatole France: all men are forbidden to sleep under bridges, to beg in the streets, and to steal bread -- the rich as well as the poor.
From Austin, TX, 11/14/2008
Hmmmm...."recovery"....that's pretty hopeful. At the moment the reality is less consumer spending = less and less jobs = less spending = less jobs, etc., repeat and repeat until....depression?
Let's be just a little bit more cautious on presuming we know which way things will go. Yes it could be only a recession. Yes, it could end up as a multi-nation or world wide depression, lasting 5,8,10 years.
From Austin, TX, 11/14/2008
Amy, the savings rate did not go up last summer.
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Here is a different narrative. The drop in the bucket went directly to credit card (and gasoline card) payments. The credit cards were then used--in excess of those payments--- to purchase imported consumer goods.
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Honestly, did you put your tax rebate in the savings bank?
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Take a look at the oil price spike. That was the tax stimulus.
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I theorize that the government fiat money would have been better spent through direct earmark spending.
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Direct stimulation of the construction and manufacturing sectors is more productive, in the classical sense of production, than indirect stimulus of the consumer retail sector.
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Thank you.
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