In all the talk about the causes and remedies for the recession, there seems to be one obvious thing that people fail to understand.
All the fixes that are being put into place have a similar goal: to free up credit so people can buy again. Once they start buying — homes, cars, whatever — the economy will begin to pick up. And that makes sense.
But what it doesn’t address is the fundamental, underlying issue: Our economy is apparently only able to thrive when we are an overly consumer culture. If Americans stop buying stuff, things fall apart. And that’s because we have placed so much value on the items we own — too many of us determine our self worth based on that.
We need a newer car, a bigger house, the right brand of clothes, the next iPod, a faster computer. We shell out (or shelled out) $30 for 50-cent T-shirts because they came from the right store and had the right label. Maybe that’s because we have it so good that we don’t want for anything. All we have left is getting more.
But if you want a long-term fix for the economy, we need to get away from the idea that we need more stuff. We don’t. And we certainly shouldn’t base our entire economy on the idea that people need to buy and buy and buy.
Get this: About 43% of American families spend more than they earn each year, and the average American household has at least $8,000 in credit card debt. Credit card debt — so that’s not counting car loans and mortgages. That’s what happens when your culture puts too much value on owning stuff.
I know someone who lives with her husband but has no kids. He makes a ton of money. They keep adding on to their house — adding rooms and features that they absolutely do not need. Why? Because, she told me, they have to impress the other executives at her husband’s company.
That’s madness. That’s stupidity. The executives don’t care how good an engineer he is, only how many square feet his house has? That’s the grown-up version of crying for mommy and daddy to buy you the same toys the other kids have. But that’s the life she’s chosen: Her worth is based on what and how much she owns.
It’s not just her. It’s the American culture. We have to buy crap, and lots of it, simply because we’ve convinced ourselves that whomever has the most toys, wins.
Well, the whole “I need a bigger house” thing came and but us on the ass. Desperate to own bigger and better stuff, too many people over extended themselves. And the bubble burst. And now begins the desperate attempt to get Americans to buy again — to start the whole cycle over.
What happens, though, when people realize that their five-year-old car is in great shape and they don’t need a new one to impress the neighbors? Or that they can live without yet more designer clothes, or bigger hard drives, or newer cell phones? Because if people realize that, they’re not going to buy. And this whole thing will start over again.
I am certainly far from blameless. I buy (well, bought) a lot of stuff I don’t need. I own too many keyboards and too many backpacks, for starters. (I can say, though, that I bought these things not to impress anyone, but because I wanted them for myself.) On the other hand, my 2001 car — and my wife’s 2000 — are in [knock wood] great shape and certainly don’t need replacing.
Bottom line: If you want to fix our economy, you need to fix our culture first. You need people to understand that having more, bigger, newer, or branded stuff doesn’t make them better than their neighbors. Then we can build an economy based on something a bit more realistic than on how long the line is for the newest iPhone or Xbox.
The Fray
Bob Francis says:
I agree, also. However you don’t go far enough. We can never “escape” this problem, as long as the entire system is based on credit. There’s only a finite amount of wealth and extending credit doesn’t create more wealth, only moves it around. There’s just as much wealth around today as there was a year ago, and yet people thought the world economy was in OK condition then. It’s all perception. What was the old story about throwing out the money changers?
gnomic says:
Mmmm.. “finiite amount of wealth” …not exactly. Economics is not a zero sum game, not is it finite. Value comes from people making things and wanting things. Even an idea can have value that people will pay for, and ideas are (in theory) infinite.
And we don’t have just as much wealth as a year ago. A year ago we (foolishly) believed that the future held more value, and therefore it had more value. Today it has less value. This is the real impact of valuing an idea.
Extending credit can create more wealth. I financed my education with debt, adding more value to me through knowledge, enabling me to repay the debt off quickly and increase the value I contribute to the economy. This is not the only example – being able to pay health care with my credit card kept me from dying, preserving the investment in my (somewhat questionable) value to society.
So, with all due respect to Bob, this is my concern about the debate. Too many people have this same viewpoint about the economy and it is completely wrong. Blame it on a poor education system, lack of any intelligent political discourse for the last generation or two, and laziness. I add the latter because I learned very little of this in school, but though self-study with the Internet which if you are reading this, you have.
Take the time to read the business magazines and take on-line courses from MIT, HBR, stanford, and others. Here is one of my recent favorites that is simple to follow: http://www.vimeo.com/3204792
But don’t read into this a political argument as some have done. This isn’t about politics, its about economics. Economics is apolitical; it is the application of economic theory that becomes political and this prevents you from understanding the larger economic point. Economics is about people’s behavior in the pursuit of things they value, and the tradeoffs made in pursuit of that value, not right or wrong, good or bad. Those are values we add to the mix.
And the story about Jesus throwing out the money changes from the temple had more to do with the religious requirement that people pay to commune with his father than the service that the money changers provided. Today, Jesus would throw the cameras out along with the snake oil salesmen that tell people what to believe. Their message is one of power – telling others how to behave by passing laws – and little about being of service to one another.
Becky says:
I am just learning the basics as to why the economy is in the state it is in- thanks to Randy Charles Epping’s latest book “The 21st Century Economy—A Beginner’s Guide.” At this point in time, I just feel that everyone needs to go back to the basics- not spending outside of our means, etc, in order to get through this.
http://www.fusioneconomics.com/about_the_author.html
Bob Francis says:
I guess, it’s what you consider “wealth”. An old wise man once said, true wealth can only be obtained from the earth. IE; mine it or grow it.
Value and wealth are not the same thing.
Money,(cash),is only a bartering tool. It’s value is less today than a year ago, but wealth has not changed a bit. Just because we thought it was worth more then doesn’t make it so.
Bob
gnomic says:
In economic terms, value and wealth are not the same, but they do not match your aphorism either. Wealth would be an accumulation of value that can be exchanged for goods and services. Value is what something is worth, i.e. what others will pay (exchange value) for.
Although money today is generally worth more than tomorrow in most contexts, this is not a universal rule. The Euro is worth more today compared to the Dollar than it was in 1996 when it was released, even accounting for inflation.
I pay people to take away my garbage; this value does not match your description of true wealth. Nor do most other services match this definition. That old man’s description is the 18th century viewpoint (and wasn’t even true then).
This is why I’m trying to have an economic discussion of this issues. Economics is a science, and the words and definitions should be definitive.
gnomic says:
Not spending beyond ones means is great advice; if more people would have followed it, we might not be in this mess. I’m sure this author thought it up though…
It does crack me up that people are demanding that credit card companies quit raising the rates on them. I don’t have that problem. When they raise their rate, I cancel the card. I charge everything, but never more than I can pay off. People are demanding that someone give them money and are trying to dicate the terms.
I’m not saying that a lot of credit card companies aren’t screwing their customers – they are and should go out of business for it. I just can’t believe that they can spend themselves into a hole and then demand better terms.
If you don’t like the terms, don’t use the cards. Then the rates will come down if the companies want to stay in business.
Tom Landgraf says:
It’s not cheap credit, the global economy or relative currency exchange rates.
It is the inability to differentiate between wants and needs. Too many people have convinced themselves that they ‘need’ a new car, bigger house, the cutting edge electronic toys, etc. and without them, their lives are worse.
Coupled with an insecurity that not having the latest things makes you worth less in other people’s eyes.
In other words, materialism and the temporary boost in status that acquiring all this ’stuff’ somehow makes us ‘better.’
For a much different perspective on how credit is used very responsibly, how a bank in Lancaster, PA survived the mortgage crisis with virtually no bad debts because it knows its clients very well, and the clients manage their limited finances very conservatively, take a look at this article in NPR about a mortgage banker in Amish Country:
http://www.npr.org/templates/story/story.php?storyId=98156907
gnomic says:
yeah, you are probably right. nobody needs a house. or an edukashun. I should blame myself for the mess I’m in after 20 years of education and 35 of hard work, saving my money, and watching half of my money evaporate. I guess I needed that. And all those damn poor people actually believe that the American dream applied to them! Its their fault; they started this problem by confusing theirs want of food with needs. And they just aren’t taking the hint and dying off fast enough from lack of heath insurance and neglect in their neighborhoods. Perhaps we should just issue hunting permits for the poor – it would be great sport and a modest source of income.
gnomic says:
While I agree, its not that simple. I wish it were.
Cheap money for the last 20 years resulted in overproduction. We have too much stuff, which is what causes prices to fall and people to be unemployed. Too many houses, cars, etc. But it also caused us to structure our economy on the availability of cheap money from our competitors and our enemies who loan us the money we pay them for junk and oil.
You can’t simply change our behavior overnight; the economy will collapse. You are seeing changes in spending that is roughly about 3% different on average – and look how things are changing!
Worse yet, the whole system is unsustainable and the assumptions that we built the economy upon are changing. We see it are larger companies with economy of scale cannot compete, where increasing investments result in less and less return. We see it in the fear that many have, because the rules that we’ve been playing by for years aren’t yielding the results we expect.
Capitalism as we have come to know it isn’t winning. WTF? I’m as surprised and shocked as the next guy who is realizing this.
This doesn’t mean that I’m switching to socialism, or communism, or some other -ism that ignorant people cling to and espouse like a religion with a green paper god. It means that I’m taking a step back and looking at the entire socioeconomic system dispassionately and asking myself, if this isn’t working, why and what will replace it?
I don’t have any clear answers yet. Its not the end of the world (although that may happen for other reasons: climate change, swine flu, rouge nuclear nations), but it may feel like it as the value of our money disappears.
Tax cuts aren’t going to save us, nor is the massive mugging of our kids and grandkids. Your behavior – quit spending and start saving – isn’t going to change much either.
The only way out of this game is to create real value, from energy to climate protection to health care to more efficient systems that do not rely on an economic system optimized to a single variable (profit) and so dependent on government regulation to compensate for the various forms of pollution that it generates, from real toxins to things like unemployment and bubbles. These forms of “economic pollution” are unwanted by products of a system that hasn’t kept pace with global connectivity and challenges.
In other works, we have to start rethinking everything. Everything. And we need to start thinking about what we want these systems to accomplish and what trade offs we want to force explicit decisions upon. Today, unemployment is an unmanaged side-effect that shifts much of the costs to workers.
Perhaps we can design a better system. But we can’t do it if everyone is so entrenched is defending a status quo that they truly don’t understand.
So quit thinking of this problem in simply terms. Start learning about economics and its limitations. Then join in the conversation with an educated viewpoint, not repeating dogma from fox noise or air america.
Note that I didn’t offer any solutions. I don’t have any. I’m still studying the problem. All I know for sure is that none of the solutions solve the root cause of the problem – they all simply shift the pain of one of the symptoms into the future.
But if you have an idea, can we discuss it rationally?