Spending Isn’t a Panacea for the Economy

I’d like to have a dime for every time consumers are urged to start spending the country out of this recession. I’d like another for everyone who accepts this wisdom, figuring that their fears for their own financial health must be unreasonable, and unpatriotic to boot.

But there are problems with this simplistic exhortation. For one thing, increased spending in these times might be short-lived help, equivalent to lighting, then burning out one candle. For another, decreased spending has so many advantages that maybe the country should find another way to recover.

Granted, the situation is gloomy. The economy has been depressed since before the Gulf War, particularly the two-thirds accounted for by consumer spending. People aren’t buying houses and cars, and retail sales in general have been weak.

No wonder experts believe that more trips to the mall could “jump-start” the economy. No wonder President Bush urged everyone to “lend, spend and invest.” More consumer spending has obvious advantages: The more bought, the more sold, the more manufacturing, the more employment, the more consumer dollars for spending.

Those who see consumer spending as all to the good may make other associations. They speak of consumer “confidence” as automatically bound to purchase, assuming that optimistic, secure people are impelled to shop, and conversely, that big spenders are secure people. They find more goodness yet in the corollary to more spending--less saving. If the goal is to jump-start the economy, nest eggs are selfish.

Nothing’s that neat, of course. “In the long run, it’s probably a good idea for a country to save a lot of money and invest it,” says Sandra Shaber, economist at the Futures Group in Washington. “But if consumers really were to save more in the next couple of months, the recession would get worse. Individuals ought to save their money in tight times, but if everyone did, we’d be in big trouble.”

It’s a moot point: People aren’t saving now either. The personal saving rate is very low right now--”circumstantial evidence,” says a recent report from Salomon Bros., “that consumers are troubled by loss of income, not confidence.”

For people who have lost their jobs, increased spending, even for God and country, isn’t a real alternative. Given future uncertainties, it’s not even such a good idea for those who still have jobs--and an inclination to spend while they have money.

In fact, there’s a big benefit in consumers spending less and saving more. In uncertain times, it sure beats debt, which is proof of a healthy vigorous economy only if people are able to pay it back.

Apparently, consumers are already buying differently, and buying a lot less. Retail sales, currently 33% of our economy, says Ira Kalish, economist for the Columbus, Ohio-based Management Horizons retail consulting firm, could sink to 30% by the decade’s end.

“Thrifty chic,” Time magazine called it, focusing on the affluent, who have a choice. For everyone else, it’s just thrift, or something even less pleasant.

Those who can will still buy food, clothing and other necessities. What they won’t buy is “discretionary durables,” says Kalish--cars, furniture, electronics, new appliances, any major purchase that can be postponed.

They’ll also replace fewer things. Most households, for example, already have telephones and TVs, says Jeffrey Rayport, environmental management specialist at Harvard Business School. “Most of the telephones and TVs bought are therefore upgrades, and not even mandatory upgrades, like going from a black and white TV to color.”

With fewer goods bought, there will be fewer discards, and less packing material, to go to the landfill. Recession could thus bring about environmental benefits never before achieved, given the lack of an official environmental policy.

Whether it’s fashion, stress, or lack of money that makes consumers spend less, it’s certainly not exhortation. As two-thirds of our economic activity, consumer spending is certainly “an elephant,” says Shaber, “but this is an elephant that doesn’t lead. It follows.”

What’s more, one can hardly assign consumers the whole burden of jump-starting the economy. “What we’re going to see,” says Kalish, “is a shift in the type of economy, with some losers and some winners.”

Probable losers include retail sales of consumer goods, and associated manufacturing, although there may be some growth in certain consumer services--education, health care, leisure pursuits. Winners could include companies in exporting, or in new kinds of machinery or technology.

Nevertheless, consumers can certainly take the jump-start exhortations as warnings: Everyone is going to push consumer purchases. It’s just easier to fight for consumer dollars than to switch.