Consumers Slash Spending

The lead article in today’s New York Times is titled, “Consumer Thrift in U.S. May Last After Recession.” Its describes potentially permanent changes in the spending habits of the American people and its implications for the current economic recovery.

The article notes that typically consumers accounted for 70 percent of the nation’s economic activity, and that much of it was financed by their growing stock portfolios, rising home values and credit cards. Now, however, with a nervousness about the future caused by the current crisis, they are living within their paychecks. In addition, saving rates have grown. Originally less than two percent, they have recently grown to four percent.

In my opinion, this article provides an ominous forecast of our economic future and the current anemic recovery. It describes structural changes in the American way of life, and, while they may be prudent for individual American families, their cumulative effect could be negative and ultimately put the brakes on our economic future.

One wonders what the appropriate solution might be. Surely, we can’t tell families to be irresponsible again or that we need to create another bubble. Perhaps, the best way forward is to increase total U.S. wages to make up for the increased amount of savings. Then, the overall situation would increase government revenues and spur spending within our means.