Are Consumers Driving Us into Recession?

By Llewellyn H. Rockwell, Jr.

With recession looming or already here, the time has arrived for finding scapegoats. Expect a long list of these. Here is the target of the day: tightfisted consumers. A decline in personal consumption, writes the New York Times, “would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.”

This recalls Bush’s advice after 9-11, when he assumed the mantle of the nation’s personal financial planner. He told everyone to go out and spend money so the economy could avoid recession. Even then, there was confusion about whether he was right or wrong. Some sensible voices pointed out that economic expansion is based not on spending but on capital expansion rooted in savings. That is to say, the only path to future prosperity is delaying current consumption in favor of future investment.

One only needs to think of the household budget here to see the point. If you are planning for the future for your family, what is the wisest course? Does one go into debt as much as possible, buy the largest house and the biggest car, throw lavish parties, hand out all existing liquid funds to friends and strangers? Based on the view that consumption is the way to avoid economic problems, this would indeed be the right course.

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.

There is no question that this is what is happening. American Express reports that the rate of spending by its cardholders fell 4% in December. Surveys of consumer satisfaction with the economy report a 15-year low. Retailers report that December was a “blood bath” (NYT’s words) for them, with sales growing at the slowest rate in seven years. Market watchers are mostly concerned that high-income buyers are bailing out.

Again, it is critical to keep cause and effect in mind. The pullback on spending is not going to cause a recession. If we think about the long term, this is not a dangerous trend but a hopeful one. The more people pull back and save, the more the foundation is laid for a recovery after the current correction takes its course.

To see that requires that we take a long view. Government, however, seems constitutionally incapable of seeing the long term, much less doing the right thing to prepare for it. Making matters worse, this is that dreaded event called an election year. Prettying things up to make the economy palatable to voters is priority number one.

What does this mean? More monetary expansion. More government spending. We can fully expect the Bush administration to resort to its old program of sending checks out to every American family with the proviso that the money has to be spent, not saved.

$15 ” Just because something involves ‘macroeconomics’ doesn’t mean that we should throw out all good sense.”

No doubt that many people would be thrilled by this. But look beneath the surface. Government has no money to spend on anything that it doesn’t extract from the pockets of you and me and the whole American public. This is easy enough to see concerning taxes. It is not so easy to see when the government runs up debt that is guaranteed by the printing presses.

The monetary issue can be understood by analogy to orange juice. The more water you add, the less substance it has. If you keep adding, eventually you come to the point when you can no longer tell that it was ever orange. This is the same with money. If you print enough — literally or electronically through the credit markets — it will continue to lose value. If money grew on trees, it would be about as valuable as autumn leaves.

So long as we have a central bank, government will be tempted to take the easy path of easy money. There do not need to be any secret phone calls from the White House to the Fed. The culture of policymaking itself is capable of broadcasting the right signals to all important players.

In any case, it is a myth that the Fed makes policy independent of political pressure. It is subject to the screams and hollers for looser credit in the same way that bureaucracies are responsive to demands for more regulation.

Yes, government can increase consumption, but by doing so it does nothing to care for the long term. The long-term health of a nation is not different from that of a household budget. Tough times require cutbacks and a beefing up of savings.

So let’s not demonize the consuming public for doing what it should be doing. It’s a good rule of thumb that when the government tells you to spend money, you should close your wallet.

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Llewellyn H. Rockwell, Jr. is president of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com, and author of Speaking of Liberty. See his Mises.org archive. Send him mail. Comment on the blog.

Global Warming Statists Threaten Our Liberty

By Deneen Borelli
January 23, 2008

Life, liberty and the pursuit of happiness – “unalienable rights” cited by our Founding Fathers in the Declaration of Independence – are now at risk as left-wing activists seek to curtail our liberties and personal choices to save the planet from supposedly man-made global warming.

No one is saying global climate change doesn’t exist. We all know the hot era of the dinosaurs later gave way to the frigid Ice Age. Throughout recorded human history, with and without the presence of factories and other factors blamed for today’s alleged rising temperatures, there have been many warming and cooling trends.

What is unresolved is the role man actually plays in climate change. It is easy to be skeptical of the man-made global warming hysterics when the scientific data remains inconclusive and uncontrollable events, such as volcanic eruptions, can do more harm to the atmosphere than man.

Despite all the ambiguity, our liberties are at the peril of this dubious theory.

Cars and trucks are at the top of the leftist hit list. Special interest groups’ attacks, particularly on the SUV, spurred lawmakers to dictate the type of cars and trucks available for consumers in the new energy bill by mandating increased vehicle gas mileage. To meet the proposed increase in the corporate average fuel economy (CAFE) standard of 35 miles per gallon, vehicles will inevitably become smaller and lighter. Consumers who need or prefer bigger and safer vehicles will have fewer choices as manufacturers struggle to meet new government fuel mandates. As a result, the freedom of consumer choice will be greatly diminished.

Even lighting your house is now in the crosshairs. Politicians and activists want to invade our homes and empty our wallets when they call for replacing incandescent light bulbs with more costly and energy efficient compact fluorescent light bulbs (CFLs). To remove any element of consumer choice in the matter, the recent passage of the energy bill will phase out the old bulbs and force consumers to purchase only the federally-approved CFLs. While CFLs are said to last longer and reduce power plant emissions of carbon dioxide, they have a number of drawbacks. Not only is the initial cost of a CFL bulb up to ten times higher, but they emit far less light. CFLs also contain the toxic element mercury, which means they may require special means of disposal and pose a health risk should they break.

In touting its concern for the environment, General Electric – which manufactures both types of bulbs – is aggressively promoting CFL use. While the changeover may be profitable for GE as a company, its American workers will suffer because CFLs are not manufactured in the United States. As incandescent bulb use diminishes, so will American jobs.

What you eat is also a target. Animal rights groups want people to adopt a vegan diet because they consider farm animals a significant source of “greenhouse gases.” People for the Ethical Treatment of Animals (PETA) is even criticizing Al Gore – who just won the Nobel Peace Prize for his global warming activism – for ignoring this alleged connection. The ads show an image of Gore holding a chicken drumstick with a tagline: “Too Chicken to Go Vegetarian? Meat Is the No. 1 Cause of Global Warming.”

Despite the numerous flaws and ambiguities in trying to link human behavior and global warming, activists and their allies in government use emotion and alarmism to make their case. They are seeking to cut off any reasonable debate and silence their critics by saying these people are motivated by corporate and personal greed and don’t care about pollution. That, however, is hardly the case.

Critics of the global warming agenda are motivated instead by a love of freedom and civil liberties. They want a discussion based on logic and facts that will address any problems without depriving us of liberty and personal choice. They do not want to sacrifice our way of life based on fears of an unproven theory.

After all, the loss of liberty is a greater cause of alarm than global warming.

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Deneen Borelli is a fellow with the Project 21 black leadership network. Comments may be sent to DBorelli@nationalcenter.org.