On Spending Money

I remember an event in my life many years ago that seems relevant today. It was during a period of personal rebuilding after realizing that I had built my life on a foundation of sand and needed to find a set of principles to live by that were more lasting than self-gratification and self-aggrandizement. This was not a religious thing; it was more just a case that what I was doing, while outwardly successful, was inwardly failing me completely.

Money, which had been plentiful before, was in short supply. At one point I had some spare cash and decided I was going to go out and buy something simply because, for the first time in quite a while, I could afford to. I went to the store and walked around for some time, but I just couldn’t find anything I wanted. After a while I left with the money still in my pocket. Later I recognized that a change of significance had occurred, that I had achieved a measure of growth.

I knew that spending money was not going to make me feel good.

I’ve thought about that as I read about the “economic recovery stimulus” package that is being discussed these days on this kumbaya bipartisan basis. The one thing that seems to be universally agreed is that,

we have to put money specifically in the hands of people who will spend it.

If the money goes to people who use it to pay down excessive debt the economy will still be screwed. The high levels of debt, high levels of bad debt which will be defaulted upon, is not the problem. If we put the money in the hands of people who will save it the economy will still be screwed. The lowest-ever level of personal savings is not the problem.

The problem with the economy is that people aren’t spending enough.

Ever since the economy first became a concern I have been looking at the casual statement that consumer spending is the “backbone of the economy,” that it accounts for more that 70% of GDP, with a degree of disbelief. Not that the condition exists, but that everyone is so comfortable with it. My father died more than 25 years ago but I recall him mumbling something, when he read about the economy back then, to the effect of, “Hell, we can’t base an economy on selling each other hamburgers.”

Actually, we’ve done worse than that - people would have to continue buying food to avoid starving. We’ve based our economy on selling each other flat screen televisions, using borrowed money to pay for them and sending that money overseas to import them. To paraphrase, “That giant sucking sound you hear is money leaving the United States.”

I have long wondered how can a country survive when it doesn’t actually produce anything. Historically, America has been a manufacturing country, but over time we have allowed that manufacturing capacity to erode and now we produce very little other than military hardware and software. We have become the world’s largest debtor, and when spending slows the solution seems to be that we should spend ourselves deeper and faster into debt.

Politicians claim that “putting money into the hands of people who will spend it” will create jobs and boost the economy. Certainly it will do the latter, at least momentarily, since the economy consists primarily of people spending money. But how is it going to create jobs?

Suppose I own a store and my sales are down because consumers are not buying in my store. The government hands out a bonus and a surge of people come in and buy things in my store. (Our government does like “surge” policies, doesn’t it.) Am I going to expand my store and hire new people based on that? Not if I have any sense, since I am bound to know that the spending spree is over and will not benefit me past the short term.

Inflation occurs when an economy is booming and materials and workers are in short supply. Competition for inadequate resources raises the costs of them. Recession occurs when an economy is slumping and there are too many goods available. Prices for materials and wages drop because demand for them is low and no competition exists between users of them.

When inflation and recession occur simultaneously something is fundamentally flawed in the economic model, and I don’t think it’s going to be fixed by a quick handout of “putting money in the hands of people who will spend it.” I’m not enough of an expert to know in detail what the solution is (or solutions are), but I just don’t believe that this is it.

I do believe that our economy can recover, but I think it’s going to be a long and difficult process. It’s going to involve things like rebuilding our manufacturing base and restoring productive, well paying jobs. It’s going to mean fundamentally restructuring our tax codes in some fashion. It’s going to mean stopping “cooking the books” on unemployment and inflation numbers and looking at what they really are. It’s going to mean real health care reform, not just minor changes in health insurance coverage. It’s going to mean, above all else, eliminating our dependence on foreign oil.

Just spending a little money isn’t going to make us better.