The Theory of the Consumer Class

One of the more interesting viewpoints of the recent economic crisis is the idea that society should consume less and save more. The view isn’t interesting in that it is novel, the view that problems arise from over-consumption has been touted for years. What is interesting, is it is now a scapegoat for the problems we are currently facing. The fact is, however, that consumption is not the problem, it is the way in which consumption is being financed. The actual issue isn’t that Americans save too little, but rather that a majority of Americans are almost expected to consume from debt as opposed to equity through high prices of items in relation to wages.

The true hallmarks of a society which consumes too much would never present themselves as shocking economic contraction except for the most severe cases. The problem of over consumption is an opportunity cost as opposed to economic contraction (which in theory would be hard to pinpoint on over consumption alone). In a society which over consumes, current resources are allocated mainly to depreciating assets. For example, in an over consuming society too many t-shirts are made while science research languishes. The use of resources to build more t-shirt factories lead to a society that creates too many quickly depreciating assets while long term growth suffers from underinvestment in research. The society could easily collapse after the current depreciating resources quickly become consumed and no further output is able to support a growing population. The fact is, however, that this would be hard to pinpoint as an over consumption problem because you would have to know that the investment into science research would have made the world better off than producing t-shirts. In this example it may be easy to conclude that t-shirts are less useful than science research, but what about the case of food?

For those who claim America consumes too much and saves too little, the only facts that can be used to make this claim is that in dollar terms the average american saves very little of their income and purchase a lot of items with debt. This argument does seem to be supported by the outwards appearance of things, people do purchase most of their consumable items with debt and seem to save little. The problem is, this does not necessary mean that the solution is to consume less and save more. Currently, many feel that the housing market should have less owners of homes. Many discuss that people should not be allowed to take out large sums of credit card debt. The average consumer worried about their future income consumes less on debt and saves equity to service their outstanding current debt bills. All of these are logical reaction to a situation where people consume too much and save too little.

The problem is, the resolutions that people are discussing today will not result in more research or better economic conditions. It is not that there aren’t enough houses to satisfy demand, or that there is a shortage of t-shirts or food in America. The problem is that individuals can only consume these items at current prices using debt. Meanwhile, if Americans saved more the extra savings may result in larger funds invested into the banking system as individuals lend their money to banks for a small savings account return, but this extra savings will not necessarily be used for future economic prosperity. Extra savings will likely be held by the banks to meet their concerns for servicing their debt payments. Over consumption is not a problem for a society where many resources exist, and the consumer is unable to consume on current income.

It is possible that we might have avoided the current economic downtown if more resources were allocated to research and less to t-shirts. It is possible that the current contraction has been fueled by depreciating resources that were incorrectly priced for years.  However, it will probably be impossible for us to know for sure if that was the case, and our current sentiment that the solution is to consume less and save more may prolong and deepen the current crisis due to the shut down of a lot of production, the loss of jobs, and the decline of prices leading to a vicious circle.

The real solution to the problem is figuring out a way to allow the current economy to function with its vast creation of resources and opportunity for investment, while decreasing the debt burden needed for so many individuals to transact in society. Already we do this by flooding the system with cheaper dollars so that debt services can pay back their debts with less valuable dollars, but the re-pricing of items to counteract inflation partially offsets this. Items are becoming cheaper in dollar terms, however, the debt burdens themselves are still very high and many individuals have no way to earn dollars to pay back outstanding debt obligations. Meanwhile as individuals consume less, fewer people can earn dollars to payback outstanding debt, and their only option will be to default on this debt. Over-time it will just remain to see who can and cannot pay back their obligations.

Unfortunately the solution to the current economic crisis is much harder than saving more and consuming less. We will still have to come to a point where individuals earn enough equity to transact in society. Pricing may continue to readjust, but if you earn 0 dollars its hard for prices to adjust enough to continue economic growth. The real solution will come in the form of higher earnings/equity for a large portion of society. One quick way to solve this problem may be to allow for a one-time debt forgiveness. As odd as this may sounds, it would quicken the recovery as individuals now may go back to consuming on equity earnings as opposed to saving for debt servicing. It would allow for the long and slow process of debt defaulting to occur quicker and lead to a quicker economic recovery. Finally, as a one-time event, the moral hazard problem would be less than our continual bailouts of institutions or consumers. People would not foolish borrow without the expectation to payback as it would be explicit that this forgiveness would not occur again. However odd this solution may seem, it may be much more tenable than a slow default process or the printing of money to make debt burdens less expensive in real terms.