Consumers Cut Spending, Save Money, Pay Down Debt, Ruin Economy

[KC]

Consumers Cut Spending, Save Money, Pay Down Debt, Ruin Economy
By Laura Northrup, 8:30 PM on Wed Sep 9 2009, 5,463 views

Good work, consumers of America! You've collectively reduced your outstanding debt by $21.5 billion during the month of July. We're so proud. Except, oops, that's not so great for the economy.


The report spotlights a consumer determined to sock away cash and pay down debt following the stock market and real estate crashes. Households have saved about 5% of their income in recent months, vs. less than 1% before the downturn.

Long-term, the trend "puts (consumers) in a healthier financial position" by trimming interest costs and encouraging investments for "future needs like college education and retirement," says John Ryding, chief economist of RDQ Economics.

In the short run, though, "This does not bode well for a significant, sustained rebound in real consumer spending," Steven Wood, chief economist for Insight Economics, said in a report.In other words, what's good for us as individuals is bad for financial institutions. And for the overall economy, which counts on Americans to spend, spend, spend.

But don't let that stop you from being, you know, responsible and sensible with your finances.

Consumers cut outstanding credit by record $21.5 billion (http://www.usatoday.com/money/economy/2009-09-08-consumer-credit_N.htm?POE=click-refer) [USA Today] (Thanks, snarkysnake!)

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Posted from Consumerist (http://consumerist.com/5356012/consumers-cut-spending-save-money-pay-down-debt-ruin-economy) because I love their commentary.

I love when mainstream articles point out the complete, mind-boggling absurdity of the capitalist system.

[Muzk]

If there are less people buying, the low workers are fired first, I'd rather have a quick revolution than a slow painful anti-consumerism kind of reformism

Anyways, what are they going to do with the remaining money? Burn it? They will most likely spend it later...

[MarxSchmarx]

Anyways, what are they going to do with the remaining money? Burn it? They will most likely spend it later...


They will begin by paying down enormous current debts. At the end of it, they may resume spending. But they could continue saving "for the rainy day" the way earlier generations did.

[Die Neue Zeit]

Which goes back to the classical form of "iron law of disproportionate immiseration" and not the debt-based variant.

[MarxSchmarx]

Which goes back to the classical form of "iron law of disproportionate immiseration" and not the debt-based variant.


Could you explicate the link? Sorry, but I can't seem to discern the reasoning used here.

[Die Neue Zeit]

My programmatic take on this "iron law" is four-fold:

1) In the “trickle-down” best of times, workers’ incomes do not rise as rapidly as the incomes of those above them, and while immiserated further by interest on the growing but hidden consumer debt slavery that supports this disproportionate immiseration, they can be subject to the disproportionately immiserating effects of inflation;
2) When rates of industrial profit fall during recessions and otherwise, workers’ incomes are fully subject to the disproportionately immiserating pressure coming from elsewhere in the “freely” and “socially” exploited labour market – namely from the reserved armies of the unemployed – and specifically unprotected workers’ incomes are fully subject to the disproportionately immiserating effects of inflation;
3) When rates of financial profit fall during recessions and otherwise, much of workers’ incomes are diverted to consumer and mortgage debt payments, while still fully subject to the disproportionately immiserating pressure coming from reserved armies of the unemployed and, for unprotected workers’ incomes, the disproportionately immiserating effects of inflation; and
4) During depressions, the absolute immiseration of workers’ incomes towards subsistence levels is in full effect.

[MarxSchmarx]

Appreciate the clarification, comrade. But I must admit, I am still not clear as to how paying back debt as such contributes to immiseration. The argument you make seems to rely on some variant of stagflation invariably operating during downturns. It is not obvious, a priori, why this should be the case.

True, one could argue that insofar as it does not increase the present standard of living and is focused entirely on debt repayment (a dubious assumption given how credit works in most developed countries), standards of living by definition cannot rise.

And you are correct that the pool of the unemployed can put downward pressure on wages, and that the repayment of debt can, in principle, accentuate the process of inflation as it frees up capital to invest in novel development. But, at least from a neoclassical perspective, the invariable result of such deployment of newly available capital must be employment, or, at least, decreased unemployment. Certainly this is not true at the national level, but on the international level has some validity. Automation is the second "monkey wrench", but even this, at least currently, still requires workers to produce the automated manufacturing parts.

Moreover, given that growth ultimately requires growth in the consumer sector, insofar as debt repayment allows more of those with a secure income discretionary income, it seems employment must grow as that income is spent. If the income is not spent, this would be just as likely to work against inflation as a stagnation of wages. As such, the inevitable inflationary tendency that facilitates the immiseration continues to elude me.


My programmatic take on this "iron law" is four-fold:

1) In the “trickle-down” best of times, workers’ incomes do not rise as rapidly as the incomes of those above them, and while immiserated further by interest on the growing but hidden consumer debt slavery that supports this disproportionate immiseration, they can be subject to the disproportionately immiserating effects of inflation;
2) When rates of industrial profit fall during recessions and otherwise, workers’ incomes are fully subject to the disproportionately immiserating pressure coming from elsewhere in the “freely” and “socially” exploited labour market – namely from the reserved armies of the unemployed – and specifically unprotected workers’ incomes are fully subject to the disproportionately immiserating effects of inflation;
3) When rates of financial profit fall during recessions and otherwise, much of workers’ incomes are diverted to consumer and mortgage debt payments, while still fully subject to the disproportionately immiserating pressure coming from reserved armies of the unemployed and, for unprotected workers’ incomes, the disproportionately immiserating effects of inflation; and
4) During depressions, the absolute immiseration of workers’ incomes towards subsistence levels is in full effect.

[Die Neue Zeit]

Appreciate the clarification, comrade.

Comrade, I failed to mention that the vocabulary used above is meant to be agitative as well as educative. Ferdinand Lassalle of old had his heart in the right place when talking about some sort of "iron law of wages," but Marx sharply criticized the Malthusian implications behind this phraseology (blame Ricardo) - both when Lassalle was alive and when he was dead (Critique of the Gotha Program).

So the phrase "iron law," despite Marx's snide about "sponges" (in his Critique), is thus used, and so is "disproportionate" used instead of "relative."


But I must admit, I am still not clear as to how paying back debt as such contributes to immiseration.

[...]

Moreover, given that growth ultimately requires growth in the consumer sector, insofar as debt repayment allows more of those with a secure income discretionary income, it seems employment must grow as that income is spent. If the income is not spent, this would be just as likely to work against inflation as a stagnation of wages.

In mainstream macroeconomics, I learned that "saving" (which includes saving to pay down debt) doesn't contribute to the GDP / national income formula: Consumption + Private Investment + Government Spending + Net Exports (Exports minus Imports). "Saving" actually reduces Consumption. This is why the setting of interest rates is counter-cyclical. Right-wing propertarians say that this "punishes" savers.

Less Consumption leads to the second point above ("when rates of industrial profit fall during recessions and otherwise"), but I think you know this already.

Anyway, yeah more discussion about consumer spending, debts, and what not is needed.

[MarxSchmarx]

Comrade, I failed to mention that the vocabulary used above is meant to be agitative as well as educative. Ferdinand Lassalle of old had his heart in the right place when talking about some sort of "iron law of wages," but Marx sharply criticized the Malthusian implications behind this phraseology (blame Ricardo) - both when Lassalle was alive and when he was dead (Critique of the Gotha Program).

So the phrase "iron law," despite Marx's snide about "sponges" (in his Critique), is thus used.


Good points all. It is always valuable to put the phrases and terms we use within an explicitly historical context.

In mainstream macroeconomics, I learned that "saving" (which includes saving to pay down debt) doesn't contribute to the GDP / national income formula: Consumption + Private Investment + Government Spending + Net Exports (Exports minus Imports). "Saving" actually reduces Consumption. This is why the setting of interest rates is counter-cyclical. Right-wing propertarians say that this "punishes" savers.


From a macroeconomic perspective, you may have a point, though there are two responses. First, one could argue that "consumption due to debt" should legitimately be counted as consumption, or if so, deductions for future consumption/private investments should be made to account for the repayment of debt. Second, the conventional argument that


"Saving" actually reduces Consumption.

is broadly true, but in fact can be misleading. For instance, if I save, say $X to make a down payment on a house worth z*X (z>1), and consequently "purchase" the house I would have not been able to without a down payment, it is not obvious that saving must per se reduce consumption. Insofar as the traditional analysis cannot account for such transactions (which underlie many a debt related purchases), there is some serious limitations to conventional macroeconomic models.


Less Consumption leads to the second point above ("when rates of industrial profit fall during recessions and otherwise")

This itself is patently correct and you are absolutely right that it is beyond debate. One must ask, however, consumption by who? For instance, gov't consumption of military goods can increase apace despite stagnation in consumer consumption, albeit only for a relatively limited time (but for several decades this would be possible). This leads to the related question fo a "recession experienced by who". Ultimately, as capital becomes more and more liquid, recessions become localized phenomena to which the working class suffers disporportionately as capitalists simply convert their assets into regions/segments of the economy where a "recession" does not exist, as, for example, as occurred wrt military production in the US and the UK during the "recession" following dot-com bubble bursting.