Tuesday, September 28, 2010

Consumer Spending, the Faltering Engine of the Economy

I've expressed skepticism at the idea that, faced with serious financial stress, American consumers suddenly became frugal, grasshoppers transformed into ants, diligently saving for a rainy day. The New York Times suggests that my skepticism is appropriate:
The substantial drop in credit card debt in the United States since early 2009 has been widely attributed to newly frugal consumers. But analysts say that a significant portion of the decline is actually the result of financial institutions writing off billions of dollars in credit card debt as losses.
Nonetheless, the idea persists that all it will take to get the economy going again is for people to start spending and, among those who most ardently advance that theory, that it's something close to a sin for people to be saving money instead of spending it. (Yes, we want to eliminate pensions and slash Social Security, but stop saving.) Via Calculated Risk, this is not unique to the United States - to the extent that part of Britain's rationale for depressing interest rates has been to try to encourage consumer spending, and that retirees "should 'not expect' to live off interest" and should "eat into their capital a bit". The article notes that, despite their responsibility, savers took a big hit from the financial crisis. Now they're expected to spend down their savings to, in essence, bail out the people and institutions who drove the crisis. At the same time, it's not in dispute that in Britain the savings rate is falling.

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