After years of people going into deeper debt to fund steady increases in consumption, it seems like consumer spending is finally going to give, just in time for Black Friday and the high retail season buckling under the strain of increased fuel prices, drops in housing prices, and suddenly tighter lending standards. Both the Economist and BusinessWeek ran cover stories about the possibility of a recession in America stemming from consumers inability to keep on consuming. The Economist story notes that “even if the economy technically avoids a recession, it will feel like one to most Americans—because it will be led by consumers. That will be a big change. Consumer spending has not fallen in a single quarter since 1991; it has not fallen on an annual basis since 1980. Consumers barely noticed America’s last recession—when low interest rates and high house prices kept them spending solidly.” In other words, easy credit has made consumers feel entitled, even obliged to spend. The loss of disposable income/loan funds to spend will force consumers to get more creative to stretch their dollars to provide the same amount of shopping excitement. If shopping action can be likened to gambling action, shoppers may have to drop down to cheaper tables and throw out fewer bets for the dealers.
For years, credit was easily available, at interest rates that almost made it imprudent not to borrow, especially considering that housing prices were perpetually increasing, supplying new collateral for further borrowing. Hence people would extract equity from their homes in the form of loans and spend it on consumer goods. The stereotype—one I admittedly have a weakness for—is that self-indulgent Americans were splurging on flat-screen TVs, luxury cars, electronic gadgets and whatnot, but it also includes things like college tuition, cell-phone services, child care, medical expenses, and things less glamorous and easy to condemn as wasteful. (Law professor Elizabeth Warren has a good paper on the “overconsumption myth.” She argues that “The Over-Consumption story dominates any discussion of the financial condition of America’s families, but when all the plusses and minuses of changes in family spending are added up, a very different picture emerges. Families are spending less on ordinary consumption and more on the basics of being middle class.” Whether the basics of being middle class are skewed, or subject to hedonic-treadmill style escalation into frivolous unnecessaries is a different question, but people feel obliged to spend what they must to hold on the status they achieved, regardless of whether what they spend it on is truly useful or necessary in the abstract).
Michael Mandel’s piece in BusinessWeek surveys the likelihood of a consumer pullback, balancing the optimists against the pessimists and ultimately making it seem as though consumer spending is divorced from underlying economic forces, and that consumers instead respond to vague impressions they get from the economic zeitgeist. Thus, Mandel comments that the Fed needs to use rate policy to encourage consumers to remain calm. “More rate cuts by the Fed can cushion the impact of the consumer cutbacks but not avert them altogether. It’s best to think of this as the end of a long-term spending and borrowing bubble, where the role of policy is to keep the inevitable adjustment from turning into panic.” If rates stabilize, perhaps people will continue to feel comfortable tapping the “about $4 trillion in unused borrowing capacity on their credit cards” that remains available to them in the aggregate. Because ours is such a consumerism-oriented culture, institutional forces to encourage shopping regardless of conditions are already entrenched—think of the expanse of the advertising infrastructure, or the way shopping today is a news story on every local news program across the country, or the flood of credit card solicitations that come to our mailboxes virtually daily.
I’m prone to mistaking a drop in consumer confidence as a pervasive and potential loss of faith in consumer values, even though the two have little to do with each other. Just because people report that they are worried about how much they can spend doesn’t mean they have suddenly made their peace with doing less shopping and finding alternative preoccupations. It’s not like they are losing confidence in the promised power of things to make them happy. If anything, advertisers likely redouble their efforts in down times and people rely more than ever on the fantasies ads evoke, in lieu of being able to actually get the things advertised. The fantasies can sustain them until purchasing power returns, and the objects of the fantasies probably become even more alluring.
But whenever consumer confidence dips, or consumer spending drops, or retailers report weaker earnings than expected, I tend to see this as good news, as proof that people are busy doing something else. That’s probably because I think of consumption mainly as frivolous consumerism, as a self-defeating preoccupation with acquiring things rather than making the best use of them. If economic conditions diverts people from consumerism, maybe then they will refocus on making the most of what they already have, better conserve what already exists and find alternatives to consumption for ways of spending time—to consume leisure rather than goods, to avail oneself of shared, cooperative public activities rather than retrench in private and partake in invidious comparison—figure out ways to gloat about how much higher on the ladder one is, or how one’s belongings prove how much better one’s taste is in things.
But of course, when consumer confidence drops, and consumption levels suffer, growth is restricted, investment falls off, and unemployment rises along with general anxiety. People are not likely to seize upon recessions and relative privation as great opportunities to get in touch with the “things that really matter in life,” as consumption measures do take those things into account. This is where the longstanding argument about whether levels of consumption correlate with levels of reported happiness come into play. On the face of things, the correlation seems weak; people don’t tend to be any happier as their incomes improve, since they adapt quickly to their new horizons, and the stress of keeping up with unfamiliar mores in new socioeconomic classes takes its toll. But some argue that self-reporting is no way of measuring happiness because people have no useful perspective on themselves, and that the clear improvements in standards of living measured in other terms—in productivity and leisure and in the richness and diversity and quality of goods—are, though taken for granted, extremely significant advances that no one would voluntarily surrender. These things clearly derive from economic growth driven by stimulating consumption.
// Notes from the Road
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