Tuesday, August 31, 2010

The Economy and Scared Little Bunnies

    Everyone who has paid the slightest attention to the recent economic turmoil knows about Fannie and Freddie; we know about the reckless, indecent, and sometimes immoral behavior that has occurred on Wall Street; we know about the “housing bubble” and its infamous pop. All of these reasons and more are responsible for the turmoil, but these have all been talked to death on every talk-show. We have also had economic reform, which, though not perfect, indicates and awareness of the practices that caused all of this. All of this information, however, is not terribly practical for the average person. The primary question is no longer what caused the turmoil, but rather why is it taking so long for it to get fixed.
     If I could stand face-to-face with these people when they asked that question, I would happily respond, “You!”, while pointing at them. The current struggle to regain what we have lost is, in many ways, a self-fulfilling prophecy of stagnation. We so often hear about Consumer Confidence Reports, which indicate how the consumers are feeling about the economy. To skip a lot of analysis, they are scared. Why are they scared? They are worried that the economy will get worse, or that it isn't recovering quickly enough. So, what do they do? They take their money out of the stock market, they don't buy luxury items, even small ones, they don't buy that new house or car, and they don't hire that promising potential employee. What is the result of all of this? Production does not recover as quickly as it could, the housing market remains soggy, unemployment stays near record level, and the stock market looks weak (which, go figure, sends confidence lower, thus making the process repeat all over again). Let's go through this again without all of the details. Consumer worried economy will falter → consumer does not buy → the economy falters.
    This frightened rabbit attitude of the average consumer is what is making theirs lives so difficult. If people would go out an get that new house or new car, buy that TV, invest in a new business, or hire that employee, we would be able to help the economy, one person at a time. Of course, there is a risk. But it is better to take a risk at improving one's position than to resign oneself to the lot one has, especially when that lot has the potential of getting worse.

1 comment:

nineinchnall said...

You state the issue as this:

"Consumer worried economy will falter → consumer does not buy → the economy falters"

I think the real problem is that we have an exaggerated, inflated expectation of where the economy should be. The 80s' Reaganomics and the tech boom of the 90s led to headlong increases in inflation and the income of the upper class. (By which I mean the $320k/year households.) Americans retreated from their traditional saving rates and spent more than ever before. (As an example, I remember when having a game console was a luxury. Now even those living in trailer parks have several.) Unfortunately, the expectations (and thus salaries) changed to fit this new saving/spending ratio.

Now that the economy has been suffering 2003 or so, people are returning to a more reasonable level of thriftiness. This should be seen as a good thing, but as I already mentioned, pay scales and government spending are currently set based on the expectations of a spendthrift economy. So it isn't that the economy is really faltering; it's just not overachieving the way that it has been.

What needs to happen is essentially a recalibration of pay and spending across the board.

Of course, that won't happen any time soon, I'm thinking.

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