We’re Approaching the “Blame the Consumer” Stage of the Boom-Bust Cycle

For those of us who have lived through past recessions, this latest development comes as no surprise: as the US economy worsens, we’re now being told that consumers are hurting the economy because they are saving too much money. 

This is a pretty common trope among the regime economists whose job it is—apparently—to incessantly harangue the American consumer into spending every last dime he has on corporate America’s trinkets. After all, if the consumer saves “too much” money this will send the US economy into a liquidity trap. At least, that’s how the official narrative goes. 

Regular readers of mises.org won’t be shocked to hear that the alleged liquidity trap isn’t real, and it’s not at all a problem if consumers save money rather than spend it. After all, real economic progress depends on a sustainable foundation of saving and investment, and not on consumers frittering away their retirements on another round of luxury cars and Caribbean cruises. 

Back in 2001 in the days of the dot-com bust, then-vice president Dick Cheney said that Americans who were falling on hard times ought to “support the troops”—remember that worthless propaganda phrase?—by spending more money on retail goods. If you saved your money, then the terrorists won. 

As the 2008 recession got underway the story was the same, but with less jingoism. Paul Krugman, for example, promulgated the usual Keynesian gospel with an article titled “When Consumers Capitulate“ and explained how saving is a bad thing because “individual virtue can be public vice” and “attempts by consumers to do the right thing by saving more can leave everyone worse off.” 

In other words, saving money will backfire so you’re hurting America by spending less. 

So, just as we might look for daffodils to emerge from the snow as a sign of the coming spring, we look for signs of a worsening economy in the form of patronizing columns telling consumers that they’re not spending enough money. 

Perhaps the earliest sign of this phenomenon in the current cycle was April’s Wall Street Journal article—titled “Your New Lunch Habit Is Hurting the Economy“—lecturing consumers for brown-bagging their lunches. But it certainly didn’t end there. In a Sunday column for CNBC, Kevin Williams trots out the creaky old Krugmanian “arguments” and wrings his hands over the fact that Americans aren’t spending as much money on smartphones, and that it’s “costing the economy.” He writes: 

If you are holding onto your aging printer or cracked smartphone longer than you had planned, you are not alone. …

The average American now holds onto their [sic] smartphone for 29 months … and that cycle is getting longer. The average was around 22 months in 2016.

While squeezing as much life out of your device as possible may save money in the short run, especially amid widespread fears about the strength of the consumer and job market, it might cost the economy in the long run…

How exactly is it “costing” the economy? Well, it seems that if you’re not spending every last nickel on a new iPhone—remember, they don’t make pennies anymore, thanks to inflation—then you are losing milliseconds of lost “productivity.” The solution? Go further into debt for a $900 phone so that you can more quickly stay up to date on AI-created cat videos.  

The economics “experts” tell us that if you’re saving your money instead of buying more “efficient” tech, then you’re not an optimal cog in the machine of the corporate tax farm we call “the United States.” 

Of course, one may ask, how do the “experts” know if I’m better off buying a new phone, or if I’m better off saving that money for other priorities? How do they know if it’s more “efficient” for me to spend my money on a phone now, rather than on, say, tuition for my child’s education? The answer is they don’t have a clue what makes any consumer better off.  The usual media-quoted economists only claim to know these things because they have been trained to mindlessly come up with new reasons as to why it’s always better for regular people to spend as much money as possible, at all times. 

Again, this new call to buy newer smart phones is just the first sign of what is to come, as it becomes increasingly clear that consumers are tapped out. The early signs are there, such as rising delinquency rates for automobiles and credit cards. Hiring is essentially flat, and the unemployment rate is rising, even as immigrants self-deport by the hundreds of thousands. October foreclosures were up, year over year, by 32 percent. 

We can expect more articles like this CNBC column moving foreword, with “warnings” about how consumers should spend more or else fall prey to the savings-induced evils of “inefficiency” or even outright recession.

Now is a good time to remind ourselves, though, of why these calls for maximum and immediate spending get it wrong. They key to economic growth has never been spending as much money as possible on existing products and services right now. Rather, a vibrant economy can come from saving and investment which will turn become essential capital that is transformed into productive enterprises in the future.  

That is, a better economy in the future requires saving and investment now. There is no need to worry about the consumers saving their money “too much.” Bob Murphy explains:

[I]t will be useful to spell out exactly what happens in a market economy when consumers decide to save more of their income. The first thing to realize is that people do not decide to “spend” or not; rather, they decide whether to spend in the present versus in the future. For example, imagine that thousands of couples in a large city one day decide to skip their weekly restaurant outings in order to save up for a summer cruise. At first, it seems that this would hurt the economy. After all, local restaurants see their sales drop, and so they buy fewer items from their suppliers and lay off some workers. The suppliers and workers in turn have less income to spend, and so sales are hurt elsewhere too.

However, so long as the entrepreneurs involved in the cruise industry anticipate the eventual increase in demand for their services, they will exactly offset the above effects when they hire more workers and other items in preparation for the busy summer months. The new savings (which were previously spent on restaurants) drives down interest rates, perhaps allowing the cruise operators to borrow money and pay for an additional liner. Thus the decision to save more doesn’t reduce total income or employment, once everyone adjusts to the new spending patterns. It is really no different from a scenario where thousands of people become health conscious and decide to spend their money on vegetables rather than fast food.

CNBC would have you believe “the economy” suffers when we don’t buy more new phones. In reality, it’s just iPhone sellers who suffer. The economy and Apple are not the same thing. 

In any case, no consumers should ever allow himself to be convinced that he hurts either himself of “the economy” by saving money. Lew Rockwell notes: 

But this also defies everything we know about family finance. The path to a secure prosperity is delaying consumption. One should spend as little as possible and save as much as possible for the future, and let that money be used in the service of investments that yield a solid rate of return. Those who have chosen a different path now see the folly: they are being burned in the soft housing market, for example.

The lesson is also true for the nation at large, because the logic doesn’t magically change when moving from the family budget to the national stage. Just because something involves “macroeconomics” doesn’t mean that we should throw out all good sense. But that is precisely what people have done with regard to the economy, since J.M. Keynes somehow convinced the world that up is down and left is right.

In a recession or a crisis, the right approach for individuals is to save. So too for the national economy. A looming recession will prompt a pullback in consumer spending as a rational response to the perception of economic troubles. This action does not cause the economy to fall into recession any more than more spending can save it from recession. The downturn is a fact that cannot be avoided. We don’t blame umbrellas for floods, and, in the same way, we shouldn’t blame tightfisted consumers for recessions.

So, there is no liquidity trap and saving doesn’t cause recessions and we can safely ignore all the future media articles about how saving money is bad news for the economy.