Wednesday, December 03, 2008

Slaying the Meme Dragon: Public Radio Edition

I normally give public radio high marks for their financial reporting. They were the first mainstream media source to report regularly on the housing bubble, and they've continued to provide coverage of the financial crisis in far better detail than other mainstream sources. That being said, there is a pervasive meme that has crept into their reporting that needs to be crushed: The "If Only Consumers Would Keep Spending We Wouldn't Have A Recession" meme.

The link between spending and recession was presented in a straightforward fashion at first, but slowly evolved into today's meme through interviews with financial experts as the broad crisis unfolded. Now, it seems to be taken for granted on shows like American Public Media's "Marketplace" and NPR's "Planet Money." Here are some quotes that show the evolution (emphasis mine):

"Steven Fazzari: The recession of 1990 and 1991, as well as the recession of 2001, were somewhat milder because consumer spending held up reasonably well. If we look back to the middle 1970's or the early 1980's, when we had deeper recessions, consumer spending dropped during those periods rather significantly. So as we go into this period, when high debt is likely to cause cut-back in the household sector, we have to expect that the recession will be deeper than what we've seen the past two downturns in the economy.

Jagow: But exactly how does that personal debt affect the bigger economy?

Fazzari: When consumers are building up that debt, it's a stimulative factor for the economy, because it allows them to spend more and creates more revenue for business. But when they have to pull back, when they have to pay down that debt, consumer spending necessarily has to fall, the saving rate has to rise to make the pay-off of the debt possible. The economy is going to slow unless there's some other source of spending that comes in to fill the gap where consumers have left."
High debts mean deeper recession, 'Marketplace' May 22, 2008

"Americans are now starting to pull back a little bit on their consumption, because they're feeling like the amount of money that they have in the bank is starting to shrink. The danger is that if the crisis gets worse, then you could see a real pullback in consumer spending and that would lead to a much more negative situation than we're facing at the moment."
Bob Doll, Blackrock analyst, Credit Crunch, 'NPR Marketplace Report' June 9, 2008.

"As the economy has worsened, consumers have cut back on spending, and job losses have spread through different sectors."
June Estimate: 60,000 U.S. Jobs Lost, 'All Things Considered' July 3, 2008.

"Jagow: But Chris, don't you think it's a good thing if we move away from our credit-drive economy and get back to the old days of spending what you have?

Farrell: Hahaha, sounds really nice doesn't it? Um, yes. What I worry about is the transition. Yes, you want to de-leverage, and we took on too much debt. But I hope that it happens over a period of many years as opposed to fairly quickly."
Recession will inspire a new frugality, 'Marketplace' October 2, 2008.

"Laura Conaway: Simon, is the advertising of the recession having an effect here?

Simon Johnson: Yes it is, and I'm afraid that a lot of retail consumers are feeling the same way Jesse and his wife are feeling. There's a little bit of a shock with regard to what's happened... and I would like to gently encourage Jesse to go back into the stores and buy a few things, maybe a large coffee or something. We really do need the consumer to keep at it."
Economist Makes House Call, Prescribes Buying Something, 'NPR Planet Money' October 28, 2008.

"Kai Ryssdal: Alright, so, in the best case scenario, the Fed buys up outstanding mortgages. That pumps more money into the market for new home loans. The banks start lending. That pushes interest rates lower. More people start borrowing and buying. And pretty soon we're all, recession? What recession? Well we asked our senior business correspondent Bob Moon to track down the answer to another question. Is this gonna work?

Bob Moon: There is reason to hope this is more than wishful thinking. Standard and Poors chief economist David Wyss says although the credit markets are still in turmoil, the Fed has achieved limited success with similar actions. Such as, buying up corporate IOUs to get business credit circulating again.

David Wyss: Some of the programs have been effective. The Fed's direct purchases of commercial paper, for example, seem to have freed up the commercial paper market. They're hoping that this will do the same thing for the mortgage market."
Will economic stabilization act work? 'Marketplace' November 25, 2008

"Ryssdal: Let me ask you what this does to the larger economy, then. If some people might actually spend more but probably the great majority of people won't, what does that do, what does that tell us?

Ariely: Well, then we get into a self-fulfilling prophecy, an escalation of bad things. You know, the biggest way to get into a recession is for everybody to believe that there is a recession. And by the process of doing it we would all spend 10 percent less, 5 percent less, have less money. People would lose their job and it was completely escalating. In fact, the whole thing about recession is mostly about a social coordination game. If we could all agree that saving now is not the right strategy, and we should trust ourselves and we should all build together and pull together, the outcome would be much better than if we didn't."
Despite 401k, maybe you should spend, 'Marketplace' December 1, 2008.
What we have here is a failure to think critically. Sure, there is a socioeconomic dimension to the recession, but changes in consumer preferences and spending habits happen all the time. And from what we witnessed on Black Friday, there is no lack of desire to spend. No, the problem is, consumers are physically unable to spend as much as they used to. They've exhausted all their means. HELOCs are over. Credit cards are maxed. Savings are depleted. They just can't do it anymore. We've achieved Peak Credit.

I am not saying that this lack of the ability to spend won't have dire consequences for the economy. Far from it. However, it's important that we stop confusing the issue so we can avoid stupid policy measures that only cause further indebtedness and prolong the downturn.


Anonymous said...

Well, there is the old fashioned way.... work.

NPR in touch? I remember when the local staff of 65+ were just too tight in the old office and had to do the multi million $ expansion.

How can a high school station operate with 1/2 dozen?


Max said...

All in all I think the public radio guys are really trying to get it right. They just need to keep their healthy skepticism alive, even when they're interviewing nice economists from Harvard.

Buying Time said...

I also think the whole "public perception" goes along with this. Public perception is primarily an issue when there is an over reliance on credit. If the fundamentals are strong (people living within their means and spending what they make), perception would not be as much of an issue.

patient renter said...

The idea that a pullback in consumer spending will hurt the economy is valid. It is possible to "think" ourselves into a recession by choosing to spend less. Produced goods do need to be consumed, but not all of them. Consumer spending is only a portion of the economy, so the idea that you can spend yourself out of a recession and into prosperity is an absolute fallacy, and really a bunch of Keynesian crap.

The keys to a wealthy and prosperous economy are production and savings. That is all. Debt based consumption destroys savings, so what does it do to wealth? It destroys it. What does it do to the economy? It destroys it, but not immediately. As we all know debt and inflation are pretty good at propping things up and keeping the good times rolling for a while.

Just as a teenager spending wildly on a credit card, a nation spending wildly on debt and newly printed dollars can be enough to keep the economy growing, but only for a while. Eventually the bill comes due, and we are reminded again that the keys to a wealthy and prosperous economy are production and savings. Period. Anything to the contrary is, as I said, Keynesian crap.

Unforunately, Keynesianism rules the roost, and delaying the inevitable is always the most politically viable option, but that doesn't mean reporters shouldn't know better.

patient renter said...

Eh, apologies for the rant, but this exact topic has bothered me a lot too (I listen to NPR also), so it was pent up.

Max said...

Public perception is primarily an issue when there is an over reliance on credit.

That's the greater fool theory in a nutshell. What was amazing about the credit/housing bubble this time was the participation rate.

the idea that you can spend yourself out of a recession and into prosperity is an absolute fallacy, and really a bunch of Keynesian crap.

You said it, not me. :) People forget the deflation "threat" in 2000-2002 that arguably led Greenspan to lower rates to begin with. The credit bubble we just experienced was a result of Keynesian policies. Look where that got us.

We're back to the definition of insanity: doing the same thing over and over and expecting a different result.