Since the economic crisis began and economists immediately starting citing individual overconsumption (in addition to Wall St. greed, the housing bubble, and bad government economic policies), there has been this sense of having to continue spending to get ourselves out of the recession. An article appearing in the New York Times today entitled "Our Love Affair With Shopping Malls is on the Rocks" put this point of view quite succintly: "If we don't spend, we don't recover." There's only one problem with this - it's totally and completely false. Let's take a minute and look at why.
The utter collapse of the financial sector has been one of the major reasons why this crisis has hit so hard. The banks don't have any money, which means that they're not willing to lend any money, which means that companies can't borrow any money, which means that companies can't undertake large investment projects such as building new factories or increasing R & D spending. When companies aren't able to take out loans for long-term investment, jobs aren't created. So how do we get around this problem?
SAVE!!! When we save money, it goes into the banks. This will loosen the credit market, meaning banks are more willing to make long term loans. When companies have more access to cash, they are more likely to undertake long-term investment projects. This will create more jobs, which will help the economy recover. For the argument that people won't put the money in the banks because they'll have to pay off credit card debt, I suggest that paying off credit card debt also loosens the credit market.
Interestingly, one of the major criticisms of the Obama stimulus package is that when people get the money, they won't spend it, but rather, put it in the banks. What people fail to understand is that money in the banks is a good thing. It's just as good as spending those dollars on a new pair of shoes. So the next time someone tells you that we have to spend, spend, spend to recover, get your bull-shit radar out and see through it.
Words to live by. Well put.
ReplyDeleteI can really see you writing for the Wall Street Journal or New York Times.. or some elite intellectual magazine.
ReplyDeleteThe saving vs. spending issue is a bit of a double edged sword. On one hand you're completely right regarding the necessity of saving and the long term benefits it reaps, if consumers save now they'll be able to spend more in the long run. The difficulty is that a balance has to be struck because, ultimately, money has to be spent for the economy to function (and there is also a certain multiplier effect to this: as spending increases, profits increase, income increases and spending increases further). I do agree with the cause of the current economic situation which was certainly a lack of saving; the balance had tilted in the wrong way with foreign capital supporting the consumer frenzy.
ReplyDeleteWhat you've simplified a bit here, however, is the difference between consumer and government spending. Most economists have been calling for government spending as of late, to stimulate the economy and facilitate job growth (please no tax cuts). I'm fairly sure most reasonable people agree that consumers (and businesses!) need to save more, and while they're at it, put their money in save investments instead of toxic default swaps and other imaginary investments.
These thoughts are a bit oversimplified and unclear but I can't put it down crisper since I'm supposed to be going through excel sheets at work right now ;)
Peace Alex, nice blog, I dig it. Your writing is very impressive. Greetings from Singapore, Vincent