Spend more to stimulate the economy. Wait, what?
Here is something I don’t understand about the economic slowdown we’ve been seeing and hearing about lately (for me, this is all based on NPR.) Forgive my shallow knowledge of how economic systems work – layperson speaking.
The Fed and the federal government seem to think that we’re heading into a recession, and that the solution is to get people spending more money. But there has been all this buzz in recent years about how Americans on the average are saving NOTHING and are in monstrous piles of debt. If we are in an economic slowdown caused by people hanging on to their money for whatever reasons there may be, but the level of spending we’ve fallen from was too high to begin with, then doesn’t it stand to reason that to a certain extent our economy has been based on reckless American consumerism, and that if everyone spent and saved responsibly perhaps we wouldn’t be in such a jam?
In the middle of typing that paragraph I had a conversation about it with my husband, who successfully conveyed just how complicated a crazy little thing like “an economy” can be. But still.
It goes further than economics – buying bigger, better, newer cars drives up resource-intensive automotive manufacturing. Using more fuel, whose price then goes up not just because of increased consumption but because of decreased supply on top of the whim of oil companies. I chose the auto industry because I think that auto production is especially dangerous to the environment, and because it is a big industry, requiring many different types of materials, and a product which touches most people’s lives in the US.
Buying a used car saves money, reduces debt, but then would not trigger the expansion of the auto industry. The outcome of any monetary expenditure would be economic growth, but in the case of a used auto, its impact would be felt at a slower rate.
It’s bad to buy things we don’t need, which is what I feel we’re being encouraged to do. A tax rebate plan to get people to spend money rather than save it seems like a dangerous idea.
I guess I’m just a little peeved at America’s collective financial irresponsibility, and I wish it were possible to rehabilitate the economy in such a way that it wasn’t dependent on people overextending their budgets and credit. People buying things they don’t need has an impact far beyond the economic markets – environmental, psychological, etc. Not to mention the impact on consumers’ personal finances.
I realize I’ve jumped around a little here. I’ve just had these thoughts and questions in my head for some time, so I’m eager to have this post written and move on. I welcome your thoughts on this matter, please share your comments!
Sphere: Related Content
It’s a total mystery to me. I guess by going into debt to buy a new car we are creating jobs at the car factory? I really don’t know.
The “spending is good for the economy” is part of a theory that was popular (but exaggerated) during the “Voodoo Econmics” of Reagan and Bush 1.
The principle is “The Equation of Exchange”: PQ = MV for any given period:
Avergage price of the goods/services purchases * Quantity of all goods/services = The quantity of money in those transactions * Number of times a dollar is spent (aka the Velocity of money)
If you set the period to 1 fiscal year, PQ equals the Gross National Product of a country. The idea is that every time one dollar changes hands, it increases the GDP by more than just $1.
The problem with this theory is inflation–P goes up, so the GNP looks bigger, but it’s a huge disincentive for increasing V. And while runing up debt DOES increase V temporarily, it’s an illusion that it helps the economy, because for every dollar you deficit-spend, you’re going to have to take (principal + interest) dollars out of V later!
Wow, that was probably really boring.
Docmanhattan – is GNP the same as GDP?
I didn’t find it boring, but b/c I’m not an economist, I had to read it several times to figure out what it all meant… I am sure I need to read it again.
Cheryl – I think that the debt we’re in is dangerous. I think that the debt we’re teaching our children is dangerous. The amount of people who live beyond their means everywhere, b/c spending is encouraged and people are encouraged to flaunt their money (or an imaginary amount), is supremely scary.
I saw a Barbie commercial where it was a store, and the girls or Barbie (can’t recall which) had an unlimited credit card. Does that not flash DANGER?!?!?!?
It’s all very scary.
noelle’s last blog post..ooooh! 007 Teaser poster
@noelle:
Gross National and Gross Domestic product are a little different–they factor in our foreign trade a little differently. I knew they were different, but I didn’t know how until just now when I looked it up.
http://en.wikipedia.org/wiki/Gross_domestic_product#GDP_vs_GNP
The much shorter version of what I wrote above is: some people believe that the faster the average dollar changes hands, the better for the economy. It’s a theory full of loopholes and mysteries, but it informed a lot of the 80s economy, good and bad.
@Doc, your explanations were very clear and I didn’t find them boring at all. I never would have learned that GDP and GNP were different, and now I”m pretty sure I understand them! So basically we’re being advised to spend more based on faith in a theory that was kind of grasping at straws to begin with? Greeeeeat. But where would I look to learn more about a bettery system for describing our economy? OR economic systems in general?
@noelle, The debt we’re in is scary and not just for the obvious personal financial reasons. It means that the money people are pumping into the economy has to eventually be paid back sometime, which in theory means it would be coming back OUT of the economy. Would that our national economy were not hinged on overspending and consumption.
yes, there’s a lot of scary stuff going on with regard to spending and teaching children through exposure. (I’m proud to say that Sami always goes for the cash when she opens my wallet. haha) I don’t know how to teach Sami positive values about spending without shielding her from experiences and products that don’t conform to my ideals, and it seems unrealistic that she should have a whole childhood experiencing none of the barrage of bad role models, etc. After a certain age or maturity/awareness level, shouldn’t she learn to think critically about these things, and learn to resist the hype?
Anyway. Not to derail this into another parenting conversation. The things encouraged for adults are introduced to children, and it is scary. Though I haven’t seen the Barbie commercial because I don’t watch commercials (yay DVR.)
There is a reason I am proud to say I have never bought a new car. It’s a financial disaster. I don’t have any credits cards with a limit over $500. And when I wanted to make my major purchase last year (my digital SLR), I took a second job and saved my ass off. And you know what? It just feels better.
That’s not to say I am perfect. I save like crazy but I also use that savings to go on expensive trips. I don’t have the required two months back-up salary for emergencies, etc, etc.
But I digress. I agree that the idea of spending money to improve the economy is the idea of stealing from peter to pay paul. But I’m also biased because I think that capitalism, with it’s constant growth model, is a doomed perspective.
@Jessica – I didn’t know you had a second job! Mad props on holding up school, full time AND part time work!
I don’t think that merely having a credit card, regardless of its limit, is behind the debt and spending problem. It’s lack of education and misuse of said cards. Speaking as someone with a spending problem (I’m not “over it” in the same way that alcoholics are never “cured”) it’s easy to fall into the credit trap. I’m lucky enough to have family and friends who really helped me through that problem, but I digress. Someone who pays off their credit cards in full every month is just as responsible as someone who doesn’t have cards, or has a low limit. Though I suppose having a limit that is still in tangible dollar amounts certainly can keep someone from getting into debt they can’t repay.
Would it be fair to say that it’s not the constance of the growth but the expected RATE of growth (AKA large) that is the problem? In your opinion, what is a perspective less doomed than capitalism?
A thought came to mind here…I was watching Bill Mayer last night, and in his monologue he talked about how the rebate check will be in the mailbox of the house you just foreclosed on. Think about the irony of that one…its a slap in the face if you ask me…they tell everyone to spend, spend, spend…and they think a $300 rebate check is going to solve the economic problems….
Amy’s last blog post..30 days ~ Day 30