Tag Archives: consumer spending

Paradox of thrift: what’s a poor consumer to do?

Paradox: n. a statement that is seemingly contradictory or opposed to common sense and yet is perhaps true

Poor: adj. impoverished, beseiged

Paul Krugman (Nobel prize-winning economist, Princeton professer, and liberal NY Times pundit) spoke to a packed house in Portland the other night as the first in our annual World Affairs Speakers Series.

The theme for this year’s series was supposed to be “The World in 2020” but Krugman rightly assumed that his audience was much more concerned about what was happening in the world in 2009, so he talked about the economic crisis.

He was funny*. And pessimistic. His basic message was that it sucks out there, everywhere – and that we have a right to be worried because we’ve never been in quite this sort of pickle. And furthermore, it’s a global crisis.

We poor consumers who have already lost jobs, health insurance, and homes  aren’t stupid. We tighten our belts, hunker down and dust off grandma’s formerly quaint advice on cooking dry beans and saving string.

But thanks to the “paradox of thrift”, our sudden crave to save is making the economy spiral down faster. If we don’t buy stuff, companies don’t earn enough money to make stuff, so they lay off workers – or they drop their prices to woo buyers, causing their competitors to do so as well which also leads to stuck inventories and laid off workers.

Giving us a tax credit or tax cut may put a few bucks in our pockets, Krugman says, but we use that to pay down debt, which doesn’t help the economy. We should be spending

(Didn’t we just try that?? like for the past couple of decades?)

If he were to advise Obama he’d tell him to make the stimulus package big enough… like about $2 trillion (!) because that’s what’s needed to get people working again so we can return to our spending ways. Unfortunately a ginormous stimulus package is a hard political sell.

Meanwhile, all the money I’ve saved from eating dog kibble the past few weeks just flew into my dentist’s pocket. It appears that kibble chomping can crack a tooth.

* Sample Krugman joke: “Capitalism is a system of exploitation of man by man. Socialism is the reverse.”

Pricking the prosperity pipe dream

Prosperity: the condition of being financially successful, flourishing

Pipe dream: illusion (orginally related to smoking opium)

“Oh, you’re just a bunch of whiners,” said a McCain advisor last month.  Everything’s great – just a little problem in the housing and mortgage end of things. Yeah, maybe gas is more expensive than it was, but drill a few more wells and we’ll be fine. Quitcher bitchin’.

Tell that to the people I know.  To a person, we’re feeling the pinch and we’re cutting back on all fronts.

According to Robert Reich, former Secretary of Labor in Clinton’s administration:

…This isn’t a normal downturn. The problem lies deeper. Most Americans can no longer maintain their standard of living. The only lasting remedy is to improve their standard of living by widening the circle of prosperity.

The heart of the matter isn’t the collapse in housing prices or even the frenetic rise in oil and food prices. These are contributing to the mess, but they are not creating it directly. The basic reality is this: For most Americans, earnings have not kept up with the cost of living. This is not a new phenomenon, but it has finally caught up with the pocketbooks of average people. If you look at the earnings of nongovernment workers, especially the hourly workers who comprise 80 percent of the work force, you’ll find they are barely higher than they were in the mid-1970s, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Per-person productivity has grown considerably since then, but most Americans have not reaped the benefits of those productivity gains. They’ve gone largely to the top.

Inequality on this scale is bad for many reasons, but it is also bad for the economy. The wealthy devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, the very wealthy are more likely to invest their earnings wherever around the world they can get the highest return.

This underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their paychecks. But they have now run out of such coping mechanisms.

Coping mechanisms we have used and outgrown include:

  • Women joining the workforce to augment family income
  • Working more hours
  • Borrowing. Big time. Credit cards, home refinancing.

Proper progressive that he is, Reich suggests:

…the long-term answer is for us to invest in the productivity of our working people — enabling families to afford health insurance and have access to good schools and higher education — while also rebuilding our infrastructure and investing in the clean energy technologies of the future. We must also adopt progressive taxes at the federal, state and local levels. In other words, we must rebuild the American economy from the bottom up. It cannot be rebuilt from the top down.

I’m with him on this. It’s a standard public health approach, with long term benefits to be reaped only after the pain of spending preventive money up front.  It’s the right thing to do, just as the right thing to do in Iraq and Afganistan is to build schools, roads, hospitals – ask Greg Mortenson hero of the bestseller Three Cups of Tea.

Will we do it?? Not till the Republicans are in a much greater minority.

Meanwhile, I know that as I buy less, the folks who built the stuff I’m not buying have less to build, and the folks who own the factory where these folks are building less stuff are buying fewer raw materials, which means the folks who mine or ship or create those raw materials have to cut back too…. and pretty soon everyone is hurting.