Waking Up From the American Dream

David Brooks has an interesting column in which he essentially gives a platform for David Platt.

Platt is a preacher who thinks that it is time for us to give up the American dream of living better. This reconsideration of the American dream is not unique to the religious world. People like Michael Polan, who argue for eating locally grown foods, are also suggesting that health and happiness might lie down a path of moderated consumption.

I am sympathetic to these notions. I've argued more than once that one of the characteristics of the new economy will be a shift from an emphasis on quantity of goods to quality of life. But I think that Platt probably gets something wrong.

Progress rarely means going back. The way out is forward.

In the early 1900s, consumer credit and the birth of mass consumption that made mass production profitable was challenged by the religous groups. They pointed to Paul's injunction to "owe no man" as evidence of God's disapproval of credit. For them, credit was a social evil and the thought that people might be free to buy goods simply because these made them happy was itself a little sinful.

But credit is an essential part of the modern economy and so is consumption. I do think that we'll consume fewer "things" in the future. Already we've shifted to spending an increasing amount of money on virtual products rather than real ones.

Towards a Sustainable Recovery?

The new numbers suggest that our recession is receding.

New home sales (June) +11%
Home prices (June) +0.5%
Durable goods sales (June) +1.1%
New jobless claims (four week avg) – 1.5%
GDP growth in 2nd Q -1% (down but not as much as many economists had expected)
Dow Jones (July) +8%

Yet the one measure that has some commentators worried is that "consumers are scared," to quote George Stephanopoulos. Households are spending at a lower rate than before the recession. This, to me, is the best news of all.

I'm not sure why we'd want to return to a household savings rate of zero. If we pull out of this recession by some means other than unsustainable consumption, we might just fix a problem much bigger than a few quarters of economic contraction.

Stupidly Optimistic (or what if consumption were finally sustainable?)

Retail sales plunged by a record amount in October as shoppers reined in spending with home prices falling, although plunging gasoline prices also reduced outlays by consumers.

Sales slumped 2.8 percent last month to a seasonally adjusted $363.7 billion, the largest decline since the series began in 1992, the Commerce Department said. The previous record was a 2.65 percent drop in November 2001 in the wake of the terrorist attacks that year.

Retail sales fell 1.3 percent in September. Meanwhile, consumer confidence rose unexpectedly, according to a survey released Friday, as tumbling gasoline prices offset worries about unemployment and recession. [full story here]

There are two reasons that consumption has dropped. Both seem to me like good reasons.

One is that the cost of things has dropped. Home prices during the last year and gas prices in the last couple of months have plunged. If you "consume" the same amount of gas or new houses, your total consumption drops. That seems like a good thing.

Today at Costco, gas prices were 2.09 a gallon - down about $114.00 a gallon from just months ago. I felt so excited about the low price that after I filled up I drove around the block and came back for more. I repeated the drill half a dozen times - I just could not resist filling up when prices were so low.

Home prices are down. My children have got a chance to actually buy a home here in San Diego someday. Why people thrill at rising home prices escapes me. Housing - like fuel or clothing - is a cost and if it is lower we have more money for other things.

And finally, consumption is down. Keep in mind that we've been saving about 0% of our income for the last decade or so. This kind of behavior falls into the category of unsustainable. We can't continue to consume at such a rate. That consumption has dropped is great. It suggests that we have a chance to get savings and spending set at rates that can be sustained for more than a mere decade or two.

The bad news is that the economy is staggering. The good news is that this difficult adjustment might just result in a new level of consumption that can be sustained. It doesn't surprise me that consumer confidence is up.