When A Reduction In Consumption Is A Good Thing

By Henry K. Hebeler at Marketwatch

News media have learned to headline a reduction in consumption as a bad thing since it often comes before possible job losses, a poor stock market or a reduction in local, state and federal tax receipts.

Articles in The Wall Street Journal like “U.S. Consumers Remain Cautious,” point out that consumption is two-thirds of our economy. Hence it’s good to encourage spending. This is very short-range thinking. When people aren’t consuming, they are saving. You can’t simultaneously spend and save the same dollar.

National savings are a disgrace. The median savings for 55 years and older is only $33,000, according to the U.S. Government Accountability Office. After World War II, people saved about 10% of their after-tax income. Savings rates are now only 5%. Most of that 5% is from higher income people. We have to cut spending, hence consumption, by at least 5% as does the government or future generations will be unable to pay interest on the government debt, much less the principal.
During World War II, households saved over 20% both because things like new cars and appliances weren’t available and because saving was patriotic. Now the government wants us to spend, not save, to make the economy look good. Industry enthusiastically applauds.

When I was young, our family had no credit cards and we were encouraged to save 10% of our income. Then, a very large percentage of people also benefited from their employer’s defined benefit programs, i.e., pensions. Now, a better savings target is more like 15% due to the reduction of firms offering pensions. Instead of pensions, employers now offer defined contribution plans like a 401(k)— which only about half of the employees use.

When older, I headed planning for Boeing for six years. Operational plans were short-term, largely aimed at delivering a quality product with costs low enough to make a profit. Long-term plans projected markets that went three or more decades out. That meant some corporate money had to be used to develop products for the future. Our short-term objectives had to be compromised or we would go out of business.

Our political system has fallen into the spend-it-while-you-got-it routine. Perhaps, it’s even worse and should be stated as promise-it-now-because-we-can-borrow-more. All of this leaves future generations with a terrible burden just to pay the interest without hope of paying the principal. Our national debt is about $18 trillion, but we have over $200 trillion in unfunded promises.

Industry isn’t allowed to ignore future obligations by law. A company has to report its future obligations for debts and pensions. If companies want their stock price to hold up, they have to show that they will be able to pay for those obligations. Individuals too have to show they can make future payments when they apply for a mortgage. But there is no law that says that people have to be prepared to retire. Retirement planning is a do-it-yourself enterprise. People must look ahead at what retirement income they may need and how it will be offset with Social Security, pensions and withdrawals from savings that must stretch for decades.

So both individuals and politicians have to be thinking more about the long-term. Politicians have to bring their promises in line with future government income at the expense of fewer votes. As individuals we have to learn to be self-sufficient by compromising our consumption with some savings for the future.

Right now, both individuals and the government are way out of whack and are unwilling to make some short-term sacrifices so their future will be better.

Source: When a reduction in consumption is a good thing – MarketWatch