Consumer Confidence or Consumer Recklessness?

Economics — Posted by Donald P. Goodman III on February 23, 2010 5:35 PM

The current economic crisis is often blamed in part on a “crisis of consumer confidence.” The essential problem, according to those who place such blame, is that consumers just aren’t confident enough. Because they’re not confident enough, they’re not making lots of purchases, which cuts down on orders from retailers, which cuts down on transportation orders for distributors, which cuts down on orders from manufacturers, and thus hits everybody. The important thing, it’s said, is to get consumers confident again so that they’ll start spending again.

Along this vein is the oft-repeated statement that “the consumer is two-thirds of the economy.” Since the consumer is two-thirds of the economy, we need to get him spending his money, or the other one-third won’t work anymore. What’s more, that single two-thirds will shrink, thus costing everybody, consumer and otherwise.

Let’s think about those statements for a moment, however. First, let’s take “the consumer is two-thirds of the economy.” Let’s take care to ensure that we’re understanding this statement properly, and that I’m communicating my own thoughts about it clearly. The statement reflects the fact that consumer spending makes up about 70% (rather more than two thirds, really) of America’s Gross Domestic Product (GDP). GDP, in turn, is the market value of all goods and services made in a country in a given year. It can be calculated in a number of ways; however, because of easy availability and good reliability of figures, the “expenditure approach” is generally used. This approach simply sums the total consumer spending, investment spending, and government spending within that country, adding in also the difference between exports and imports.

Investment spending is a bit counter-intuitive in this case, because it doesn’t refer to what we normally think of when we think “investment”, which is the purchase of stocks and the provision of venture capital. Investment spending for GDP purposes, in fact, specifically excludes such spending. Rather, it includes money spent on clearing fields; building factories; buying better equipment; upgrading old equipment; digging new mines. In other words, it includes money spent on production, either improving ongoing production or beginning new production.

Consumer spending, on the other hand, includes just about all other private spending. Money spent on goods, whether durable or non-durable, and all services are included. So every time we go out to eat; buy a computer; get some new clothes; this is all consumer spending.

So when we consider this “two thirds of the economy” figure, what we’re looking at is a stark and worrisome fact: our spending on consumption is well over twice what we’re spending on improving and sustaining our production; it vastly outweighs government spending and investment in production, and even partially offsets (though only unsustainably) our dismal import-export ratio. We’ll always spend more on consumption than production, for the simple reason that productive assets tend to be more enduring; but while our consumer spending has risen, our net exports have fallen drastically (indicating reduced domestic production), and our investment spending has dropped precipitously in the last few years (The Changing Composition of GDP).

Think about this for a moment. If we’re spending so much more simply consuming stuff than we are on actually making it, who’s spending money on producing the things that we so voraciously consume? The answer is China; Japan; Europe. In short, people other than us. And because we’re spending so much on consumption and so little on production, and because production is the real and original source of wealth, we’re spending much more than we really have. Where does the extra money come from? The answer is China; Japan; Europe. In short, from people other than us. In other words, we’re borrowing to cover for all the consumptive expenditures that aren’t balanced by proportional appropriate investments in our productive infrastructure. And, as a corollary, we’re accumulating a great deal of debt and paying a great deal of interest on it.

And that leads us to thinking about the other notion now, that the problem here is one of “consumer confidence.” Don’t we really mean “consumer recklessness?” The problem, such people say, is that consumers just aren’t spending their money like they used to; they’re saving it instead. Tightening their belts. Never mind that once this great country prided itself on the thrift of its hard-working citizens, noting that said thrift and hard work are the elements which made it economically great. Such people, though, want us “consumers” to just keep spending our money, even though we really need to save it. Even though, in the past, the money that we’ve spent is often money that we didn’t have, and that we had to borrow to spend. We need to retrench; pay off our past debts; save up a cushion in case of a fall. That means that we, as consumers, are not “confident.”

In reality, though, it means that we, as consumers, are not reckless. We’re being wise for a change; we’re being careful only to spend money that we actually have; we’re foregoing present pleasures for the sake of future safety; we’re actually, horror of horrors, paying off some debts instead of constantly racking up new ones. This is terrible! Consumers aren’t confident! Can you imagine what might happen to the economy if this spreads? What horrible disasters might befall our nation if such ludicrous practices spread, and our government adopted such an insane scheme so lacking in “confidence?”

Modern economics have led us to a strange place. Though this country was built on working hard, producing goods, foregoing unnecessary consumption, taking debt as rarely as possible, and paying off necessary debt as quickly as possible; though the wealth of every country has been based on these perennial, thrifty, and diligent practices; we have nevertheless convinced ourselves that our wealth is based on spending as much as we can, racking up as much debt as we need to in order to get everything we currently want, and letting other countries bother with the annoying hard work, production of useful goods, and delayed gratification.

Here is national suicide. We need to return to the basic principles of sound economic management. Namely, that it is production which is primary, not consumption; that it is better to save than to buy what we don’t need; that it is better to be free of debt than to have debt; and that gratification of our present desires need not be immediate, or even occur at all. Thrift; moderation; looking to the future. There is national prosperity. There, and there alone, is the solution to our economic crisis.

Praise be to Christ the King!

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Tags: consumer confidence, consumption, Donald Goodman, GDP, production