Wednesday, December 3, 2008

Consumerism, or Consumer "Confidence?"

"According to Keynes, the root cause of economic downturns is insufficient aggregate demand," quoth Mankiw in the NYT.

In plain English, people are buying less stuff. Very simply, this can be for two reasons, either: a) they want to, or b) they have to.

The latter cause is easily understood: if you've lost your job, took a pay cut, or merely haven't seen your income increase with the cost of living, you tend to put spending on hold.

The former is peculiar, and is treated as such by the press. In the famous incident in which Phil Gramm told reporters that the nation's recession was "mental" it is very likely he was thinking of this group, people who curb their spending not because they are forced to by losing their job, but because they fear that they could become part of the latter category for any of the named reasons. It didn't help that he (Gramm) added that we were a nation of whiners.

When an economy is in trouble, it can most readily be saved by people -- those who still have the power to spend -- doing so. This is why some of the less-charismatic economists can show disdain for this group of folks who fear what may happen: They see this group as those who hold the solution, who are holding back out of fear and self-interest. And when those who can spend hold back, the government steps in to spend in their stead, which is anathema to the free-market orthodoxy (as well as, potentially, common sense).

But what is this group really thinking? It's usually not so conscious a thought as "I might lose my job, so I'd better hoard up cash in case I do," it's usually something more along the lines of "Maybe I don't need this thing after all." It's as if television media reporting on corporate and economic troubles (with the (conscious or subconscious) message of "don't spend more than you have to") is currently counteracting television advertising (with the (conscious or subconscious) message of "buy this thing, you need it") such that people are actually deciding what they need and what they can do without.

And the effect is what economists and reporters call "low consumer confidence" (which has the same horrible ring that Phil Gramm's comments did, i.e.: "Why don't you grow a pair, you thifty sissies?"), when what it actually is is just lower consumerism. People are deciding they're happy with what they have and they don't need more stuff. As long as people don't lose their minds navigating the conflicting messages coming from their colorful living room appliances, this is actually a very good thing for individuals.

It's bad, however, for an economy that is dependent upon full, or nearly-full employment.

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