Christmas Shopping and the Consumption Myth

In the days leading up to last week's Black Friday, the post-Thanksgiving shopping day when many retailers become profitable for the year, Americans were inundated with lots of media commentary about their Christmas-shopping plans. Various accounts suggested that with the economy needing a boost, prodigious spending on Black Friday would stimulate an economy that’s presently not firing on all cylinders.

Sadly, this theory can once again claim a body count given what happened in Valley Stream, a town in Long Island, NY. With 2,000 shoppers lined up at a Wal-Mart by 5 am, and worse, clamoring to get inside, a seasonal Wal-Mart employee was trampled to death after opening the store in order to let the ravenous scrum of shoppers in.

The notion that consumption is the economy’s driver is not new. We’re regularly told that consumption constitutes 70% of our economy; a notion that couldn’t be more mistaken. Indeed, how is that people consume without producing first? Don’t the two balance? By definition they have to.

Despite this basic truth, conventional wisdom suggests that we must spend in order to stimulate. Back in 2001, in the aftermath of 9/11, New York City Mayor Rudy Giuliani exhorted New Yorkers to get into shops and restaurants, open wallets in hand.

It would be hard to contemplate more impoverishing thinking than the above, and it speaks to the problem of macroeconomics. With the latter only concerned with broad numbers covering aggregate activity within country borders, consumption is falsely seen as a necessary input to our economic health.

At first glance this thinking makes sense; that is, until we take a micro view. Looked at from the perspective of an individual, we see that excess consumption can only impoverish. Indeed, imagine the health of the United States’ economy if every individual spent every dollar made?

So assuming Americans are prudent, and choose to not to consume, does the economy suffer? Hardly. This is true because a failure to consume in no way detracts from demand.

All we have to do in order to understand this is to once again consider economics from an individual’s perspective. If said individual has $1,000 to spend but chooses to put that money in the bank, the economy doesn’t suffer. It doesn’t because rather than sit on deposited money, banks lend it out.

Often times banks lend the money to individuals with immediate consumption needs. If so, consumption is merely shifted, while the initial depositor can claim a bank balance $1,000 greater than before.

Even better, banks often make loans to businesses. Sometimes they have immediate consumption needs for office space and the like, or sometimes they use the extra capital to hire workers with consumptive needs.

More positively, some businesses buy equipment or make investments that increase their productivity. This of course speaks to the wonders of saving in that if capital enables businesses to act more productively, they’ll likely be the recipients of even more capital; the latter enabling even more job-creating expansion.

Existing businesses could of course stimulate consumption through excess profit-sharing with employees, but this too would lead to a dead economic end. If Google, GE and Microsoft were all to pass profits onto acquisitive employees, they would then lack the money necessary to invest in future growth.

That’s why savers, be they companies or individuals, are society’s ultimate benefactors. If all we did was consume, there would be little capital to fund growth and new ideas.

Beyond consumption, we have to ask what individuals can do to help the economy the most. Excessive spending is clearly not the answer, particularly if today’s spenders are tomorrow’s applicants for unemployment benefits and other forms of aid due to a flagging economy.

The better answer is for individuals to act in their economic self-interest. In saving for a rainy day or even for a distant retirement, savers can help themselves all the while knowing that their savings will either support the consumption of others, or in many instances serve as seed capital for tomorrow’s entrepreneurial ventures.

After saving, and with an uncertain job market in mind, individuals can do best for the broader economy simply by working harder. Economies grow when individuals are productively working, and one positive of economic uncertainty is that it drives us to work more in order to produce more. This is true economic stimulation.

Looking ahead, with the economy somewhat weak, readers can count on all sorts of commentary lamenting the death of the consumer, and with the latter, the death of the economy. Nothing could be further from the truth. If we’re productive as workers, consumption will take care of itself.

So with Christmas and the economy in mind, individuals should do that which enhances their own economic outlook the most. If that means lots of work and lots of saving, those who do both should go forth with certain knowledge that they’re bringing the economy the greatest stimulus of all.