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Fallout: The Financial Crisis

Drop in consumer spending has merits

Marketplace Staff Nov 14, 2008
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Fallout: The Financial Crisis

Drop in consumer spending has merits

Marketplace Staff Nov 14, 2008
HTML EMBED:
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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.

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