Spend, Spend, Spend. It’s the American Way.
January 15, 2012 Leave a comment
GRIDLOCK in Congress implies that there won’t be any collective decision to spend more as a nation to get out of our slump. Increases in deficit spending seem unlikely, and so does the balanced-budget stimulus I’ve been advocating in this column. For now, we must pin our hopes for a robust recovery on the willingness of millions of consumers to spend substantially more.
But what really drives consumer spending? Economists are reasonably good at divining how consumers tend to react to changes in government policy, but in the absence of such policy, and when the economy is in the doldrums, they aren’t very good at predicting spending shifts.
A new book, “Beyond Our Means: Why America Spends While the World Saves”(Princeton University Press), offers some insights. It was written by Sheldon Garon, a Princeton professor who is not an economist but rather a historian with a sociological bent.
Professor Garon says that our willingness to spend is driven most prominently by our reaction to major events in our collective memory, including wars and depressions, and that it also depends on national character, which differs across countries and through time. Spending, of course, is shaped by deliberate government policies. Notably, during wartime, governments all over the world often start huge public-information campaigns to promote saving.
The United States, however, is something of an exception. More than any other country, Professor Garon argues, it elevates consumer spending to a virtue, sometimes minimizing saving. There is even an idea here that it is patriotic to spend, rather than to save.
For example, in a speech two weeks after the Sept. 11 terrorist attacks, President George W. Bush urged Americans not to be cowed: “Get down to Disney World in Florida,” he declared. “Take your families and enjoy life, the way we want it to be enjoyed.” Personal consumption expenditures increased sharply in October 2001, and the recession that had begun in March of that year came to an abrupt end by November.
In more recent times, many parallels have been drawn to the Great Depression. Presidents and prime ministers worldwide justified their stimulus packages in 2008 and 2009, for example, by saying that if these plans weren’t put in place, we might repeat the economic nightmare of the 1930s. That kind of talk might have been necessary to assure support for stimulus, but it certainly hurt confidence.
And there was another problem. The truth is that stimulus packages never entirely lifted the economy out of the Great Depression. In the United States, unemployment didn’t drop below 12 percent until World War II changed the picture.
In recent months, news that Christmas shopping appeared strong, at least soon after Thanksgiving, was invested with great significance. Holiday cheer, it was argued, might provide the needed stimulus. But this is an old story. In every Christmas season of the decade-long Great Depression, newspapers described a strong, even frenzied, Christmas shopping season.
Perhaps this offers a lesson in bias. It seems that during such bad times even the most respectable newspapers somehow needed to write an upbeat story for the holidays. Confidence-building is part of our culture, and it helps to explain confidence swings.
During the Depression, George Gallup began to compute confidence indexes. But sharp improvements in confidence, as reported in 1938 by Gallup’s American Institute of Public Opinion, did not spell the Depression’s end. Eventually, consumer demand did come roaring back— after World War II, contrary to economists’ widespread fears that the Depression would resume after the war.
Professor Garon details an attitude that Americans, more than people in any other country, have usually had about spending: we tend to think it’s O.K. for people to go into debt to buy gadgets or take vacations. According to this view, such activity will stimulate everyone’s imaginations, and ensure a vibrant economy with plenty of fresh enterprises and innovations. Americans even tend to think that debt burdens may not be so bad — that people in debt work harder to pay it off, again keeping the economic engine humming. We are relatively forgiving of personal bankruptcies, too: they provide a fresh start to allow spending all over again.
IN much of the rest of the world, Professor Garon documents, this approach has traditionally seemed morally repugnant — though until the current crisis, many people worldwide were slowly coming around to the American view.
Governments around the globe have long promoted pro-saving — that is, anti-spending — campaigns. Professor Garon notes that many of these campaigns flourished during wars, when frugality was a necessity to conserve resources. In World War I and World War II, government campaigns left a lasting impression that overspending was immoral and unpatriotic, and for most countries the campaigns did not stop when the wars ended.
The United States had such savings-promotion campaigns during those wars, too, but it gradually ended them afterward. By 1966, the United States had suspended its postal savings system — which encouraged savings by allowing people to buy certificates of deposit at post offices for as little as a dollar. Many countries still have such systems, as part of efforts to make saving seem convenient and patriotic.
Low consumer confidence during the Depression could have been caused partly by fear of war, many commentators said at the time. But it is hard to measure the validity of such claims.
In any case, fear of war doesn’t seem the main problem today, despite some unease about possible crises in places like Iran and North Korea. In the United States, there is concern about the economic stability of Europe, but barring a major collapse there, it is likely to remain a distant worry.
Patriotism may turn out to be a stronger force here. The killing of Osama bin Laden last year will probably be recounted over and over in this year’s election campaign, which, like many campaigns before it, is certain to be filled with patriotic rhetoric. But would a patriotic surge change the mood enough for consumers to take personal risks to get on with the American Dream?
While these kinds of mental and moral factors are very hard for economists to evaluate, they may be all-important for the current outlook.
By ROBERT J. SHILLER Published: January 14, 2012
Robert J. Shiller is professor of economics and finance at Yale.