A reliance on consumers whose purchases are from debt does not build a sustainable economy. Turning savings into debt and drowning in debt are not good ways to run a national economic policy. Hopefully patriotic shopping through ever-increasing debt does end, and out of the rubble a better national policy arises.
Prof. Jim McConnon, professor of economics at the University of Maine, refers to a chart from the Economic Report of the President that breaks down the GDP. In 1960, consumer spending — on durable and non-durable goods and services — made up 63.1 percent of GDP. That’s nearly two-thirds of the domestic economy.
But there is also evidence that grumpy Uncle Fred is right — the GDP has increasingly trended toward a consumer-spending reliance. Consumer spending as a percentage of GDP held steady at about 63 percent until 1980, when it began to grow. In 1990 it was 66.2 percent, in 1995 it was 67.2 percent, in 2000 it was 68.6 percent and in both 2005 and 2006 it was 70 percent.
The remainder of the economy is linked to business investment (16 percent), government spending (19 percent, a third of which is defense spending) and net exports, Prof. McConnon says. In recent years, as the trade deficit grows, the net export number has extended further into negative territory, which means any growth in the economy must be offset by more consumer spending. So that 7 percent growth in the percentage of GDP linked to consumer spending is even more significant, McConnon says.
The Bush administration has proposed an $800 billion stimulus package aimed at Main Street — not the $600 and $1,200 checks taxpayers got earlier this year, but a targeted investment to get bad mortgages and other debt off the hands of banks to they can begin loaning to consumers again. That may be the first sign that government policies are building bridges back to consumers, who hold the fate of the U.S. economy in their hands — or at least in the credit card they hold in their hands.
But at the same time, President-elect Obama must signal that consumers, whether government regulations intervene or not to save them from excess, must become more responsible. Buying $300,000 houses on annual earnings of $30,000 must end. So must spending home equity as if it is real money. Shop, but shop prudently. Gray Friday may be the best outcome.
Friday, November 28, 2008
Can the Holiday Season go From Red to Black?
A recent Holiday season tradition has been to spend more money than one has available. No worries - just pay it back well into the new years. What better way to let your family and friends know how much you care then to spend beyond your means. After all, when a credit card was maxed out the bubble solution was to just shift the debt onto the mortgage and free yourself to spend more. And who would have thought such practical solutions would not be the eternal answer to managing finances (/snark). This article from the Bangor News titled Black Friday Blues lays out some of the issues we are facing. Lets take a look -