Tuesday, January 17, 2012

To Spend Or To Save

Robert Shiller informs us that behavioral economists are beginning to study the psychology of spending and saving.

What makes people spend money and what makes them save it? What cultural and historical factors cause a group of people to value spending or to value saving?

Shiller recommends the preliminary study offered by Princeton historian Prof. Sheldon Garon, Its title is: Beyond Our Means: Why America Spends While the Rest of the World Saves.

Shiller summarizes Garon’s thesis: “Professor Garon says that our willingness to spend is driven most prominently by our reaction to major events in our collective memory, including wars and depressions, and that it also depends on national character, which differs across countries and through time. Spending, of course, is shaped by deliberate government policies. Notably, during wartime, governments all over the world often start huge public-information campaigns to promote saving.

“The United States, however, is something of an exception. More than any other country, Professor Garon argues, it elevates consumer spending to a virtue, sometimes minimizing saving. There is even an idea here that it is patriotic to spend, rather than to save.”

Shiller adds: “Professor Garon details an attitude that Americans, more than people in any other country, have usually had about spending: we tend to think it’s O.K. for people to go into debt to buy gadgets or take vacations. According to this view, such activity will stimulate everyone’s imaginations, and ensure a vibrant economy with plenty of fresh enterprises and innovations. Americans even tend to think that debt burdens may not be so bad — that people in debt work harder to pay it off, again keeping the economic engine humming. We are relatively forgiving of personal bankruptcies, too: they provide a fresh start to allow spending all over again.

“In much of the rest of the world, Professor Garon documents, this approach has traditionally seemed morally repugnant — though until the current crisis, many people worldwide were slowly coming around to the American view.”

It is fair to say that this attitude toward spending is relatively new in American culture.

If we think back to the origin of the republic we recall Benjamin Franklin’s well-known adage: “A penny saved is a penny earned.”

You may not recall another statement, equally germane to our discussion: “The way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality; i.e. waste neither time nor money, but make the best use of both. He that gets all he can honestly, and saves all he gets (necessary expenses excepted), will certainly become rich.”

If we seek clarity we should distinguish between the man who spends everything that he earns and the other man who spends more than he has earned.

Neither of them is thrifty. The first one, however, is more virtuous than the second. The second will accumulate more debt and, since he will be less industrious, will be less likely to pay it off.

Cultures may value thrift or spending. Shiller and Garon want to know that our attitude toward government spending significantly influences our attitude toward personal consumer spending.

If the government acts as though it has a divine right to spend more than it receives in tax revenues, not merely as a stopgap measure in time of crisis, but as a way of life, then citizens will also come to believe that it is better to consume today and let the next generation worry about paying off the debt.

Some economists, especially followers of Keynes, believe that massive government spending will cure an economic contraction. Others warn that a government might arrive at the point where it  is no longer able to borrow the money needed to fund its obligations.

Keynsians like Paul Krugman are horrified by the prospect of austerity. Of course, a government may choose austerity as a policy, but, if it runs out of money and credit, the markets will impose austerity, whether the people like it or not. 

Why do so many people believe in the virtue of government spending? The source seems to lie in the commonly held belief that the New Deal spent us out of the Great Depression.

For his part Shiller, a Democrat, wants to disabuse us of the notion that America spent its way out of the Great Depression.

He explains: “The truth is that stimulus packages never entirely lifted the economy out of the Great Depression. In the United States, unemployment didn’t drop below 12 percent until World War II changed the picture.”

By now the question has provoked some very serious debate among economists and historians.

Yet, for decades journalists and historians have spun out a narrative in which capitalism was nearly destroyed by the Hoover administration, only to be saved by liberal policies implemented by FDR.

Americans were sold the narrative that the New Deal worked and that Roosevelt was the greatest of presidents. Once that happened, New Deal-like policies—as in Lyndon Johnson’s Great Society—became the gold standard for American politicians.

When you ask its supporters why the Obama administration chose to fight the Great Recession with a gigantic stimulus bill in early 2009 they will tell you that Obama was merely following the example set by FDR. If it worked for FDR why wouldn’t it work for Obama.

In this historical narrative spending was a virtue. Herbert Hoover’s efforts to balance the budget were an error.

During a time of war, however, people were told to be thrifty, not to waste resources that could be used for the troops, and, to save their money… meaning, loan it to the government by buying government bonds.

After World War II it took time for America to rebuild what it had lost during the Great Depression. Once it did, and once it achieved prosperity, saving seemed to be less important.

When the country was no longer on a wartime footing it elected a younger, more charismatic president and began to address lingering social problems by using what had “worked” during the New Deal.

The Great Society was a massive government spending program. Many citizens joined the party by placing more and more value on consumption.

Thanks to the Vietnam era counterculture young people participated, not just by spending their parents’ money, but by spending their creative and rebellious energies in protest marches and free love.

If government spending is a good thing, then consumers could do their patriotic duty by buying as much as they could, regardless of whether or not they could afford it.

Spending could save the world. Thrift would destroy it.

If we want to broaden our perspective, we should point out that people are more likely to spend money they do not have when they expect inflation. If the Federal Reserve is implementing an easy money policy then most people will correctly see that it is trying to inflate the currency.

If people assume that prices will decline, as they have in the recent economic crisis, they will be less likely to spend and more likely to save.  

When an individual or a nation has accumulated a great deal of debt, inflation becomes highly desirable and deflation becomes a mortal threat.

If central banks are trying to save the world from the debt crisis by printing money they are saying that they dread deflation.

Since inflation makes prices and wages rise while your debt service remains the same it will make it easier pay down debt.

If prices and wages decline while your debt service remains constant, your hitherto manageable debt will become the monster that ate your paycheck.

Stable prices or deflationary expectations will promote the habit of thrift. Inflation will promote the habit of spending. If you expect that it will be more expensive tomorrow you will be more likely to but it today, even, or more especially, when you have to borrow to do so.

Not only does inflation make the shoes cheaper today, but the money you borrow to do it today will be devalued by the same inflation.

To fill out this outline of the way a culture values or devalues thrift, I want to show how the therapy culture has aggravated the problem.

Keep in mind that thrift involves discipline and self-control. It does not necessarily mean putting off until tomorrow what you want today. It concerns accumulating wealth more than deferring gratification.

In the world of therapy, especially as Freud set its foundations, thrift is bad. It is associated with repression, with the unhealthy effort to tamp down impulses.

Curiously, in Victorian England spending had a slightly different slang connotation.

When Victorian writers of erotic literature used the verb “to spend” they meant "having an orgasm. In their vocabulary, "spend" was the term that corresponded to our contemporary colloquialism: “to come.”

Strangely enough, saying that someone was spent by sex makes more sense than to say that he came.

If Freudian values make sex a good thing and orgasms a form of hygiene, then it is good to spend and bad to save. We will mention in passing, but only in passing, that Wilhelm Reich took this idea to an absurd extreme.

A culture that values hookups is opting for profligate spending. If you have to get drunk in order to hook up then obviously you are spending something that you do not have.

At some point you will have to pay it back.

If the culture makes sexual spending a virtue, and if it makes government spending a virtue, then clearly it will be encouraging consumers to spend. 

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