Consumption, Christmas and the Recession

On CBC news this weekend, they ran a string of stories about how families were cutting back this Christmas due to fears about the economy. There were no poor families interviewed; actually, they were all comfortably upper-middle class (the demographic stereotype of news and most television these days). One family spent $1,000 per kid (times four kids) last year. Perhaps I am just a bad consumer, of too frugal a nature, but I cannot even imagine what $1,000 worth of kids presents looks like (though I learned that they sell $300 hockey sticks these days).

Anyway, the point was to profile how these families were cutting back this year, including the advice of a consultant who advises people on such things. My recent tour of the Christmas party scene finds pretty much the same result (sans consultant): if you ask around, almost everyone plans to spend less this year.

For an economist this is like waving a massive red flag emblazoned with “Paradox of Thrift”. As consumers pull back, this weak Christmas shopping season will show up in ghastly retail sales next month, which will only serve to reinforce the sentiment that the economy is headed into recession, which will make consumers cut back all the  more. Lower consumption plus lower business investment (who wants to open up a new facility right now?) means government must step into the breech to avert a catastrophe.

But at the same time the quality of consumption matters a great deal, and that means rethinking some of the gratuitous and environmentally-destructive conspicuous consumption of recent years. Should policy be to get money back into that one family’s pocket so they can go back to buying $300 hockey sticks for the kids? Probably not, and even if we gave them a fat tax cut, they may not spend it (this Globe editorial has a nice summary of some research out of Stanford that found that US consumers did not go out and spend their tax rebates out of last summer’s stimulus package).

If there is a stimulus package under our collective Christmas tree, what should be in it? I’ve been mulling this over lately but Robert Reich has beaten me to the punch so I will just quote him:

[T]raditional Keynesianism is based on two highly-questionable assumptions in today’s world, and the underlying logic of Keyenes leads us toward something bigger and more permanent than he has in mind.

The first assumption is that American consumers will eventually regain the purchasing power needed to keep the economy going full tilt. That seems doubtful. Median incomes dropped during the last recovery, adjusted for inflation, and even at the start weren’t much higher than they were in the 1970s. Middle-class families continued to spend at a healthy clip over the last thirty years despite this because women went into paid work, everyone started working longer hours, and then, when these tactics gave out, went deeper and deeper into debt. This indebtedness, in turn, depended on rising home values, which generated hundreds of billions of dollars in home equity loans and refinanced mortgages. But now that the housing bubble has burst, the spending has ended. Families cannot work more hours than they did before, and won’t be able to borrow as much, either.

The second assumption is that, even if Americans had the money to keep spending as before, they could do so forever. Yet only the most myopic adherent of free-market capitalism could believe this to be true. The social and environmental costs would soon overwhelm us. Even if climate change were not an imminent threat to the planet, the rest of the world will not allow American consumers to continue to use up a quarter of the planet’s natural resources and generate an even larger share of its toxic wastes and pollutants.

This would be a problem if most of what we consumed during our big-spending years were bare necessities. But much was just stuff. And surely there are limits to how many furnishings and appliances can be crammed into a home, how many hours can be filled manipulating digital devices, and how much happiness can be wrung out of commercial entertainment.

The current recession is a nightmare for people who have lost their jobs, homes, and savings; and it’s part of a continuing nightmare for the poor. That’s why we have to do all we can to get the economy back on track. But most other Americans are now discovering they can exist surprisingly well buying fewer of the things they never really needed to begin with.

What we most lack, or are in danger of losing, are the things we use in common – clean air, clean water, public parks, good schools, and public transportation, as well as social safety nets to catch those of us who fall. Common goods like these don’t necessarily use up scarce resources; often, they conserve and protect them.

Yet they have been declining for many years. Some have been broken up and sold as more expensive private goods, especially for the well-to do – bottled water, private schools, security guards, and health clubs, for example. Others, like clean air, have fallen prey to deregulation. Others have been wacked by budget axes; the current recession is forcing states and locales to axe even more. Still others, such as universal health care and pre-schools, never fully emerged to begin with.

Where does this logic lead? Given the implausibility of consumers being able to return to the same level of personal spending as before, along with the undesirability of our doing so even if we could, and the growing scarcity of common goods, there would seem only one sensible way to restore and maintain aggregate demand. That would be through government expenditure on the commons. Rather than a temporary stimulus, government would permanently fill the gap left by consumers who cannot and should not be expected to resume their old spending ways. This wouldn’t require permanent deficits as long as, once economic growth returns, revenues from a progressive income tax refill the coffers.

Note: Apologies to anyone who is offended by the singular use of Christmas, especially since I go on to quote a famous Jewish economist. In my head, Christmas refers to the secular holiday of passing away the dark days with lights, food and gifts, the paton saint of which is Santa Claus, not that other guy with initials JC.