Needed: A New Economic Paradigm

What started out as a housing/finance problem has moved into the wider economy.  Unemployment has risen to 6.5% in October to a total of 10.1 million people.  This number does not count those people who have given up looking for work, and are not tracked by state unemployment statistics.  Many of those people who are still employed are nervous that they may be next.  Thus, consumer spending is down in all sectors of the economy-retail, automotive, travel, restaurants-and this shows just how much our economy is dependent upon the consumer.  Herein lies the problem.

Consumer spending makes up over 70% of the U.S.’s G.D.P., with housing the largest portion.  But houses, when they are bought by responsible people with down payments and financed by banks with scruples, are a benefit to both the homeowner and society.  The next biggest chunk of spending goes to transportation, and here is where we start to see a chink.  I have always been amazed at the number of cars sold in a year by American manufacturers, and I have always wondered who is buying all these cars?

There are many people out there that don’t buy cars, but only lease them.  Unless you are a business, this has never seemed like a good deal to me, especially when you add in all the extra things that the dealer can ding you for when you return it.  Then there are those people who trade in their car every few years and buy a new one.  But even this sort of behavior isn’t really the problem.  Where things really start to bog down is personal discretionary spending; that thing that drives this country, that makes it so strong, but is considered by many a blight-Consumerism.  That drive to keep buying the newest, fastest, and best thing that has come out, or to buy simply because the products are so cheap, Americans have jumped on a treadmill that they can’t get off of without bringing down the country’s economy.  But now that the country is in such a decline, it may be a great moment to come up with a new paradigm for our economy.  One based on personal savings instead of misguided spending.

I have confessed it before and will do so again, I am no economist.  But I can read the writing on the wall.  Right now, there is over 2.1 trillion dollars in personal debt (this does not include houses).  Apparently, Americans have learned to behave as their government does (the National Debt has reached 10.5 trillion dollars), applying the idea of spending deficits, only paying the interest off, to their personal lives.  It is this two trillion dollar sword that has kept our economy going in recent years but hangs over our heads today.  Should Americans keep spending beyond their means just so we can revive the economy?

The most apparent problem with this that I can see is, if all those people who just walked away from their houses aren’t concerned about having a foreclosed house on their credit, why should they be concerned about paying back credit card debt?  If there are hundreds of thousands of people concerned with being laid off, or worried about foreclosure, how many of them would think it is better to save the money instead of paying it to the credit card companies?  That way if they do get laid off, then they will have more in savings that will last them until they can find a new job.  (Here’s an aside-even if the auto companies are bailed out, there will still be massive layoffs before the year is out just because no one is buying cars.  This will be especially true if GM does buy Chrysler.)  American Express claims its uncollectible loans have reached 6.7%, almost double over the September, 2007 number, and the company could be in deeper straights still, with stock prices falling 30% over this time last year.

I will give you one guess who will be next up to the government window for a handout, credit card companies.  If their customers start defaulting on credit card payments and car loans, where else can they turn?  But again, we are talking about companies that are holding 2.1 trillion dollars.  There is no way the government can handle that much of a handout.  Here’s another problem, the companies holding all this debt are the ones who were handing out the bad paper to cover house loans that never should have been made.  Yes, we’re back to the banks.

Fifty years ago, credit cards didn’t even exist.  All the companies were like American Express is (though even they finally succumbed to the revolving credit products).  You had to pay the bill off every month.  Then businesses started realizing charging interest would be a good way to make money, and so they let customers start carrying balances from month to month.  That was when BankAmericard turned into Visa (1977).  In the last thirty years, it has been easier and easier to get credit cards.  With relaxed regulations in Washington, it wasn’t only credit cards that started chewing up peoples’ potential savings, but other worse predatory lenders, payday loans, car title loans, many of which run at over 300% (a rate that many loan sharks I am sure were extremely jealous of).  Once one became a victim of these fraudulent companies, it was almost impossible to get out of the system (see this for a great parody of predatory loan practices that shows the true extent of the industry).

So here is a new idea that is only new because no one seems to have been doing it in the last thirty years, save your money.  Put it in the bank, in CDs, bonds, and this is a great time to buy into the market, whether stocks or mutual funds.  There are plenty of bargains to be had.  Buy a car and pay it off, then drive it until the wheels fall off.  Don’t go out to eat four or five times a week, but cook at home.  It’s cheaper and you might find its even fun.  Take all that money and either save it for a down payment on a house or a new car when you need to buy one, or send an extra check to the bank to pay the house or the car off early.  If your TV or CD player is working fine, do you really need a new one?  Must you buy the new cell phone or MP3 player that just came out because it’s got a slicker look and can hold a hundred gigs of music?  I have a fairly extensive collection, but it only takes up around 40 gigs on my hard drive.  In other words, if it isn’t broken then do you really need to buy a new one?

Avoid the big box stores that entice you to buy things just because they are cheap.  In just this year alone, the trade deficit is over 623 billion dollars.  I can’t see how this can be good.  When there is more money going out than coming in, it seems at some point something has got to give.

When I am contemplating a new purchase, I always think about how many books I could buy for the same price (I buy used books almost exclusively).  Nine times out of ten, this will give me pause and I will walk away.  This is not to say that I then go home, log onto Alibris.com and spend the money, but that this is just a gauge of how badly I want something.  Also, being Scottish on both sides of my family, I do tend towards the frugal side of things.

This is where wealth comes from, savings.  Being able to save money will get you farther faster than anything else will.  Once the car or the house is paid for, then that money can be put away to grow more wealth.  If they are not paid for, then pay them off as quickly as possible so you can start saving.  This is one reason why the rich keep getting richer, because they have money above what they spend on the things they buy.  And this is the only way for the middle class to regain any sort of wealth status in this country.

After nine-eleven, Bush the Younger told everyone to go out and buy things.  Now, with the economy the way it is, I think we need to concentrate on saving more, that way, when the economy does get back on its feet, all of us who make it run will be in a frame of mind that is better both for us and for the country.

(I will address how the economy can be grown with a lower percentage of consumer spending in an upcoming article.)