The front page of the Wall Street Journal today has an article with a troubling headline: "Reluctant Shoppers Hold Back Recovery." I'm not bothered by what the article says is happening; I'm annoyed that the WSJ irresponsibly blames the recession's endurance on Americans not spending enough.
First, it's true that if people spent more money, that would help firms, and help get us out of the recession more quickly. Here's the actual news it reports that supports its assertion:
Retailers across the spectrum provided foreboding reports. Discounter Target Corp. reported that sales at stores open at least a year were down 6.2% from a year earlier in the quarter ended Aug. 1, while luxury purveyor Saks Inc. reported a 15.5% drop in same-store sales over the past quarter as shoppers stuck to buying basics. Building-supply chain Home Depot Inc. saw total sales drop 9.1% in the quarter ending Aug. 2, and it reaffirmed expectations of a 9% sales drop this year.
The logic, of course, is that if consumers would just spend more instead of saving, then these firms would do better. Here's the problem: they do not really have anything to spend. What are they saving then, you ask? They're saving the money they should have been saving when they were instead piling on debt for the past decade or so. The meager amount of saving that's been taking place in the U.S., while a lot more than in recent memory, hardly makes up for American consumers' paltry saving up to now. For a time, saving even went negative in the U.S.
The Journal also contributes this sobering fact to enhance its argument:
The retailers' reports serve as a reminder that it will be consumers, foremost, who will fuel a sustained U.S. recovery. Consumer spending accounts for about 70% of all demand in the U.S. economy.
And how much of that spending was credit, i.e. money that consumers did not actually have? And how much of that growth from spending was made more palatable through a cushion based on phantom, unrealized real estate-based or stock-based wealth that has completely disappeared? Americans are much poorer than they thought they were two years ago. That they're trying to reduce debts and restore the wealth they once had is not only logical, it's responsible.
Another cause for less spending should surprise no one. A WSJ source explains:
"Not only has employment fallen, but a lot people are facing salary freezes or other cutbacks," said Lou Crandall, chief economist of financial-research firm Wrightson ICAP. "That is going to have a significant drag on consumer spending going forward."
Exactly. People should not be spending money they do not have, or might not have if the job market throws them a curve. Again, that's a thoroughly logical and responsible reaction. It's utterly irresponsible to make Americans feel guilty about it.
The Wall Street Journal also includes this nice chart, showing how consumer credit has been tightened:
Again, this is good news. Credit was way overextended. That excess resulted in the recession we're experiencing today. Banks should be commended for pulling back, not chastised because they are not providing consumers with enough money they haven't earned, and in some cases, never will.
I admit that this is kind of a chicken-egg problem on some level. Growth is partially reliant on consumer spending. But in order for consumers to responsibly spend, then they need income that provides the means to do so. Yet, as long as lots of Americans remain unemployed or scared that won't happen. So the Journal and others argue that people need to spend first. I just don't buy it.
Reduced spending levels along with other components of GDP can bring about recovery, just a slower one. Let the American economy limp around for a while and slowly heal so it can find its way back to prosperity. Enduring some pain for several quarters or even years would be well worth the reward of more responsible, wealthier, less debt-ridden consumers. Patience will ultimately make the U.S. economy stronger.
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