Save or Spend - The Economy is Between a Rock and a Hard Place
Jan 8th, 2009 | By Rob | Category: Obama, credit card debt, economy
Today was a busy day for economic news. President-elect Barack Obama announced his economic stimulus plan, Wal-Mart decreased its earnings outlook after weaker than expected holiday sales, the Labor Department released data that almost half a million more Americans joined the unemployment line last week, and consumer borrowing fell a record $7.9 billion in November 2008. It was the first back to back monthly decline in consumer credit since 1992.
In some ways, the economic data released tells a simple story. Americans are overextended on credit. They are worried about their jobs and have heard (or found) that credit is tight. The result is that consumers spend less and save more. The unfortunate outcome is that businesses are not able to sell as much and are forced to lay off employees, leaving consumers with less money to purchase products and less confidence in the stability of their employment. Unchecked, it could become a vicious cycle.
A featured part of President-elect Obama’s economic stimulus plan today was a $1,000 tax cut for 95% of Americans. To some, putting extra cash in American’s pockets might be considered a win-win solution. If some of the money is saved or used to pay down debt, then those Americans will have used the money to put their own financial house in better order. If the money is spent, then the consumer will have purchased the goods and services that keep Americans employed. Yet, it turns out that it is a very delicate balance.
If Americans save too much of their money, then corporations will be forced to lay off workers and the economy will be worse off for it. If Americans continue to spend their money as they did when times were good and credit was available, the economy may be better for it but the finances of American consumers may be worse off. And at some point, their financial problems will catch up to them.
Today, the accepted solution to our current economic problems - the problem of encouraging spending while allowing consumers to put their financial house in order - is for government spending to make up the shortfall. So called, economic stimulus. Yet, the balancing act of economic stimulus is no less difficult. Too much economic stimulus and the bubble bursts in a few more years, just like it did when artificially low interest rates encouraged real estate speculation and record numbers of home owners. Too little economic stimulus, and the government isn’t able to break free of the downward spiral of the positive feedback loops from decreasing consumer spending in the American economy.
In a nutshell, that is why I believe that we are at a critical point for the American economy and that incoming President Obama’s first 100 days are so important. The economy is, after all, between a rock and a hard place.
