On MSN Money, Jon Markman (http://articles.moneycentral.msn.com/Investing/SuperModels/how-savers-could-doom-the-economy.aspx?page=1) makes the assertion that individual consumers saving money instead of spending it is bad for the economy. He asserts that the economic models used by the Obama administration are based on a classic economic prinicple-that individuals will always act rationally in making economic decisions. Thus, given the right amount of stimulus to the credit market and a reduction of widespread panic in the market will cause consumers to go back to their free-money ways, spending and splurging the economy right back into a growth cycle.
But Markman questions this assumption. He bases this thought on a oft-forgotten economic theory called the Levy-Kalecki formula (http://www.levy.org/vdoc.aspx?docid=213 ). Levy and Kalecki came up with different aspects of this theory independent of each other, Levy in the 1910's and Kalecki in the 1930's. The theories were unified by Minsky in the 1950's. Briefly, this theory is the antithesis of classical economic thought that that all participants make rational decisions based on perfect knowledge. Levy-Kalecki argue that the average person does not have perfect knowledge of all things economic, which causes them to develop incorrect beliefs and to make mistakes, especially under stress or uncertainty.
Which is true? While the classical theory is useful in macro-economic applications, it really doesn't take into count the complexity and opaqueness of our current economic situation. Obama's camp assumes that given the right amount of economic stimulus, all consumers will take a deep breath and go back to producing and consuming as we have always done. But Levy-Kalecki argues that because of the uncertainty in the marketplace and general fear of unemployment and investment losses, people will save their money and spend less. Corporate profits will continue to suffer as people save money rather than spend it. Corporations will continue to lose money which creates negative press and causes layoffs. Upset consumers continue to save money and the cycle spirals down hill.
What is true? The American consumer has to make rational decisions for himself and his family. Common sense, or our great-grandparents, would tell us to save money for a rainy day. We should not incur debt. If we have, we should move Heaven and Earth to get out of it right now. This does not mean that Levy-Kalecki is incorrect. On the contrary, individual investors are quite confused on what is going on, causing the smart ones to stay out of the market and the less-intelligent ones to pull their money out of their investments. If your money is already there, then leave it in the market.
We, as citizens, have been given a great gift. The last 10 years have seen economic growth unparalleled in human history throughout the world including the US. But many of us have sponsored that growth with our own personal stimulus plans, through HELOC's and credit cards. So banks and corporations suffer a spell while we get our own houses in order. The weak companies will disappear and the strong will tough it out. Why do monthly consumer spending numbers excite the market? Because we are the fuel for America's economy and corporate America knows it. But that doesn't mean we act magnanimous and rack up our own debt to improve corporate balance sheets. It's time for old-fashion savings. We will be happy if we do this and our children will thank us as well.
