Whining and Spending
Former Republican Sen. Phil Gramm’s keen insights into the psychology of American consumers - "a nation of whiners" bogged down in a "mental recession" - warrants the usual frenzy that accompanies a campaign gaffe. But there’s more to this one than just a top advisor to Rep. John McCain shooting off his mouth. Gramm’s comments reflect the long-held thinking of Republicans and the Bush administration, going back to the 2001 tax cut stimulus, that consumer spending can both carry and rescue the economy.
There’s a basis for that belief, of course. Consumer spending accounts for two-thirds of economic activity, and the recent stimulus bill sought to leverage that fact. By many measures, Gramm isn’t entirely off the mark; the economy still shows signs of life, from strong exports to weak but real growth of 1 percent in the first quarter. Gramm told The Washington Post that "based on the data, we are not in a recession. But that does not mean all this talk does not have a psychological impact."
And what, exactly, would that impact be? Consumers spending less. In Gramm’s view, then, the problem of people thinking we’re in a recession is that they’ll cut back on their spending, pay down debt, and start saving. Which is exactly what’s happening right now.
Considering Americans are mired in record levels of personal debt while the savings rate has plunged into negative territory, I don’t see how this isn’t a good thing, in the long run. Yes, you can send people checks with free money from the government and they’ll spend some of it, and the economy will get a short-term boost. But that doesn’t address stagnant incomes, the health insurance crisis, and other structural problems. In the years ahead, consumers need to change their long-term spending and savings habits or the economy risks deeper troubles - you can’t keep propping things up with consumers who continually spend more than they earn. One of the lessons of the foreclosure crisis is realizing the edge of financial abyss where more than a few people teeter. Medical bills, a temporary job loss, a reset to a higher interest rate, and their house is gone - there’s no emergency fund built up from years of savings to cushion the blows. Recession or not, if consumers begin changing their financial habits to make their bottom lines more secure, that’s more help to the economy than from another afternoon at the mall with the credit card. So, Mr. Gramm, please stop whining over consumers who won’t pull out the plastic. Thrift used to be a Republican value, too, and we’d all benefit from changing the psychology about how we spend.