The spectacle of hordes of shoppers schlepping through the mall at midnight with children in tow, stuffing their carts after stuffing their bellies, was a sight to behold. And apparently one to cheer.
Stocks soared on Monday following reports of a bang-up start to the holiday shopping season. Black Friday sales rose 6.6% from last year to a record $11.4 billion while “retail foot traffic” — now there’s a metric you can take to the bank — rose 5.1%, according to ShopperTrak, a Chicago research firm.
Consumer spending accounts for about 70% of US gross domestic product. As the consumer goes, so goes the nation.
Not so fast. Consumer spending constitutes growth to the extent that consumption, or C, is a component used in calculating GDP. (GDP = C + I + G + X – M, with I representing investment, G government spending, X exports and M imports.) Today’s spending boosts GDP growth in the current quarter.
Whether last weekend’s sales were as strong as retail groups made them out to be or whether they augur a trend is beside the point. The wealth of nations comes not from what we spend but from what we sow: what we set aside to be invested in productive capacity.
If spending created wealth, Greece would be rich. Neither consumers nor governments can spend their way to prosperity. Besides, there is something fundamentally wrong with a culture that promotes spending as the key to health and wealth. A multi-decade borrowing-and-spending binge whittled the US savings rate from an average of 9.6% in the 1970s to 8.6% in the 1980s, to 5.5% in the 1990s, to 3.3% in the 2000s. At one point during the housing bubble, the savings rate approached zero.
Households have been de-leveraging for three years in an attempt to repair their balance sheets. Yet many economists and policy makers advocate more borrowing and spending as a cure for what ails the economy.
It should be obvious that the US suffers from an extreme case of short-term thinking, and it underpins decisions on everything from tax-and-spend policy to monetary policy.