The Economic Conversation Enters a New Phase: Putting Consumers Front and Center Now

Today President Obama is conducting a town hall meeting in New Mexico focusing on the issue of credit card debt. This is a welcome turn in the national economic conversation from the plight of big institutions and the financial system to what is perhaps the most important part of the story of the Great Recession still not adequately understood - the weakened state of the American consumer prior to the recent recession and financial collapse.

We've told this story many times - despite robust growth in the Bush Era, incomes for a typical family fell. Most measures of consumer health during the Bush went in the wrong direction. We saw an increase in those without health insurance, in poverty, incomes fell. The lack of income growth - coupled with a flood of cheap money - helped drive increased consumer indebtedness - mortgages themselves, credit cards, home equity loans. People borrowed to maintain their lifestyles, and to keep up with the Jones. The continued consumption and borrowing was justified in the minds of consumers by the power of the wealth effect brought about the rapidly increasing value of homes and stocks. But we know what happened next. Assets fell. Incomes did not appreciably rise. The debt remained. People lost jobs. The already very weakened balance sheet of a typical family grew much much worse.

And then the inevitable happened - consumption plummeted. Repeatedly throughout this crisis the "experts" have been surprised by the weakness of the typical American consumer. They are not acting like consumers in a typical recession because for consumers the recovery they just experienced was not a typical recovery. Typical Americans have been in their own "recession" for almost a decade. Look at the Post headlines today: "More Homeowners Getting Aid, But Demand Keeps Rising," and "Weak Retail Sales Dash Recovery Hopes."

The reason that this matters so much is that consumer spending in the US is 70 percent of GDP, and it has been the mighty American consumer who has been fueling the recent global expansion. The length and depth of the current Great Recession will be driven to a great degree by the ability of consumers to start buying things again. We maintain that given their weakened home balance sheet that this could be a while. Which is why the next stage of our recovery will not be so much about liquidity or confidence. It will be about actually improving the financial position of the typical American consumer, which inevitably lead us to discussions of "deleveraging," or reducing the amount of debt on the balance sheets of American families.

Which is why what the President is doing today is so important. He is beginning a conversation now about what is happening with American families. What is best for American families now - to spend or save? Do we really want, as a matter of national policy, Americans to spend, to take on more debt? Or is it best for them to save, pull back, spend less, pay down their debts, get their own balance sheets in order? The answer to this question - being put on the table by the President today - will have a lot to do with how the current global recession ends.

My own view is that just as we have tried to figure out how to get the debt off the balance sheet of the banks so they can resume their work, we will have to talk about how to reduce the indebtedness of American consumers, and encourage those nearing retirement to save much more to replenish the losses in their retirement savings. This may mean a period of slower growth and less consumption of course - but what other choice do we have?

Cross-posted at the NDN Blog.

Comments

[mbaty]

The inevitability here is that our economy will have to shift away from mass consumption. Wasn't it fun to buy all sorts of disposable crap with our disposable income? How we've just loved the hell out of every planned obsolescence and quickly outdated technology! Now it's time for sustainability, for realizing what truly has value, and for creating a society of the people by the people and for the people, and that may mean that money takes a back seat to other considerations like the environment. It's tough, but the age of buying more and more and throwing it away to buy more is probably over. Our GDP will just have to adjust the way the American people have adjusted to stagnant wages and ever increasing extortion by our financial institutions.

[ThePeacemakers]

A lot of people got into trouble because they had to go into debt to cover BASIC needs: food, healthcare, shelter. (and I'm not talking about Caviar, Betty Ford Clinic & Mansions)

This has been building for a long time...

Oh, and another thing...if you haven't realized yet, what this country now calls "Capitalism" is TERRIBLE for the family.
The Old "American Dream" - House, Kids, & car

The New "American Dream" - House OR Kids OR car

That's the effect of declining wages.

[drymartini1]

Live within means.

Why do so many people have to buy New Cars?
Why New TV's?
Why dining out?

people should first look at themselves. stop spending beyond bare necessities and start saving.

[JohnnyWalkerBlueLabel]

Don't buy anything, especially a car from a UAW controlled company, (except maybe Ford.)

[ProAmericanLobbyist]

The government's purview:

We the People of the United States, In order to
1. Form a more perfect union,
2. Establish Justice,
3. Ensure Domestic Tranquility,
4. Provide for the common defense,
5. Promote the general Welfare and
6. Secure the Blessings of Liberty to ourselves and our posterity (Grandkids)

Do Ordain and Establish this Constitution for the United States of America.

The Congress has not helped We the People. They failed the Bankruptcy help, they failed Usury help and they have done nothing about Predatory lending and Glass-Steagall Regulation of Wall Street.

What they have done is made the situation worse for We the People by passing the Banks debts onto the People in increased public debt.

[ProAmericanLobbyist]

The Congress and Obama have not helped the Consumer. They failed teh Bankruptcy help, they failed Usury help and they have done nothing about Predatory lending or Glass-Steagall Regulation of Wall Street.

What they have done is made the situation worse for Consumers by passing teh banks liabilities onto the Consumers in increased public debt. Raher than letting the Banks fail and wiping out the Banks assets, the Governmernt has rescued the Banks and let the Consumers pay the Banks debts. The Investors and the Taxpayers are the loosers in this plan..

[Dameocrat]

The other choice is to cap interests rates stop relying on credit cards and increase American wages, which I am betting Obama won't talk about because it would offend banker donors and antilabor donors.

[Liberal2]

Dammit, I was going to say the very same thing.

[DuganS1]

Policies enacted to increase wages at this point will only result in increased unemployment as corporations will cut staff to make up for the lost profits. This means higher unemployment. Higher labor costs would also force many corporations to cut back expansion plans, which means slower economic growth going forward. The best way to increase wages is through increased productivity and reduced inflation, not pro-labor policies.

[ImmanuelGoldstein]

Productivity and wage growth has been disengaged for almost 30 years.
Increased wages will result in increased consumer spending which is the backbone of our GDP.

[ProgressiveVoice]

"The best way to increase wages is through increased productivity and reduced inflation"

Yeah, because that worked so well the last 8 years.

[James Pharo]

A conversation about American families is of course long over due, but to pretend that credit card debt is a root cause is ridiculous.

While it's true that credit cards have been woefully under-regulated (and will remain so under any "reform" that Obama and the bank-loving Dems would ever permit), the real issue is a lack of job security. For that mid-western "professional" couple (and could we all agree that "mid-western" is an indicator of location not moral responsibility?), how long would that rosy picture last in the face of persistent un- or under-employment?

Those in our society who have job security likely don't understand that those who do not have it will make choices that seem irrational to them. Buying groceries on credit-cards is famously unwise, but if the choice is to do that or to not eat, well, it's a pretty easy choice.

The only thing I really want to focus on is how do we re-deploy our assets (people, capital, etc.) so that the interests of the people are served, not the interests of the nation's shareholders (who, despite what President "Ownership Society" said, are not the same group).

Plus, this isn't just a US problem, it underlies nearly every problem around the world.

[DuganS1]

The reason many folks use credit cards to buy groceries is not because they don't have money to eat. It's because they chose to spend their money on other things, usually discretionary things, leaving themselves little left to eat.

[aofh]

People are not as flush as you think. America's middle-class has been shrinking since the 70s. Mergers and acquistions have been a big part of that forcing a lot of people into the street where many have not been able to recover the incomes they had. Add to that the "wealth effect" from the stock market and housing booms giving people a sense that things weren't so bad because all they had to do was cash in. No question that there was overspending, but I think it had more to do with people being in denial about how tough things really were for them.

[JnrNorman]

For a good economy we need NAFTA and other bad trade deals renegotiated like OBAMA promised!

Cheney&Obama CFR soulmates
We Are Change
http://www.brasschecktv.com/page/616.html

[DuganS1]

Renegotiating NAFTA will not help our economy in any way. It will, however, have very damaging repercussions in the world financial markets, which for some period would make our economy much worse.

[TJCole]

We are a government of the banks, by the banks, and for the banks....not the people..!

Didn't you get the memo...?

[eposter]

Give me a break. Obama calls for credit card reform the day after the bank loving Democrats vote it down. What kind of backward leadership is that?

[justkeepswimming]

Here's a case study for a 30-something Midwestern professional couple with 1 child.

On the debt side: No credit card debt, no car loan, no home equity loan, half-paid fixed rate mortgage on a small house in an older neighborhood, half-paid grad school loan at very low interest rate.

On the savings side: ~$200k in retirement, home equity, and college savings.

On the consumption side: 2 fuel-efficient cars with a lot of miles, a lot of hand-me-down and used furniture and appliances - probably the most valuable items in the house are computers that belong to employers.

Aside from this whole Joneses thing (who are the Joneses? why should we care?), what is the advantage to this family of increasing its consumption? Sure, "the economy" might do better in the short term if this family and others like it changed their ways, but what is the incentive to any individual family that has its spending under control not to carry on saving and eliminating debt?

[Anmbar]

The American consumer is being held hostage by big credit. As long as the consumer has to pay incresed interest and minimum payments there is no money left for anything else. As usual it's a win win for banks and credit card companies and lose lose for middle income and poor.

[mikefina]

Pathetic, and incorrect. No one is a hostage to credit card debt. DON'T USE THE LITTLE PLASTIC CARDS. Consumers volunteered to take on the debt, for the convenience (pay a little now, get a lot now.

That someone is suddenly unemployed is too bad, but should be a part of anyones personal risk calculation at time of purchase.

Yeah, the system is gamed for the Credit Card industry (banks et. al.), but what for-profits aren't?

Cash and debit cards still work in America. Even for large purchases (houses generally excluded). Some personal maturity would be a fine complement to enhanced fiscal sensibility.

[DuganS1]

Actually, nominal incomes have gone up substantially over the past 10 years. Disposable incomes have gone up substantially as well as taxes have come down. Real disposable income (adjusted for inflation) has also gone up dramatically. Real median household income per family member was up in 2007 over 2000, but not by that much. Real median household income was about the same in 2007 as it was in 2000. The reason for that is that inflation went fairly substantially since mid-2003, which gobbled up some of those income gains. The problem with the inflation metric, however, is that owner equivalent rent makes up about 40% of the overall inflation rate. So for people that have owned a house over this period (bought before 2000), they didn't see nearly the increase in inflation than renters did. So homeowners, even in the median income bracket, actually saw fairly sizable income gains.

[ProgressiveVoice]

David Cay Johnston stated, in the January/February 2009 issue of Mother Jones, that the average inflation-adjusted income of the bottom 90% of earners was lower in 2006 than it was in 1973. I can go to the web site and see if he cites sources and write to the editor if he does not.

Either the top 10% of earners have seen their incomes rise by such an extent that it shifted the median dramatically or one of you is wrong. Perhaps you will provide YOUR sources?

[itolduso]

For many workers, it began more than 2 years ago, the loss of the Christmas bonus, an increase in the cost of employer sponsored health insurance, less overtime hours, cancelling of the annual pay raise, and finally, the 4 day work week. An insidious erosion in earnings. Then the cities, counties, & states stepped in with increases in taxes & fees on everything. The cost of gas exploded. Utilities increased in cost. A trip to the grocery store could leave you in tears... milk, bread, eggs, rice, potatos...all double or more in price. Homeowners & car insurance rates climbed. Stress related illness, company closings, layoffs, depression. A perfect storm. Why are we still framing the debate around 'spend or save', when for so many working people that choice has been gone for too long. The American working class has FAILED....now how do we bail them out? That is the only question.