Consumerism: By-product of international finance? (21 Sept 2009)

It's easy to moralize about consumerism, assume it has grown up somehow out of the malfeasance of marketers and the laziness and gullibility of consumers, who are eager to replace other fulfilling ways to occupy themselves with shopping, a seemingly derivative activity that replaces the joy of developing our capabilities with the pleasures of passive ownership. This wish to moralize stems from a desire to individualize things far beyond our control and make it seem as though we are ultimately responsible for the sort of world we live in and that ultimately it suits us; it is the product of the sorts of choices we can imagine people making. Nobody, for instance, might have seemed to want that condo building that went up on the corner, or that brand new shopping center down the street from a nearly identical one, but it doesn't seem so crazy once you see the people living or shopping there. And you can think to yourself, if we can only stop that guy, the guy walking into that new Dick's Sporting Goods, or the guy who just leased that new condo, or who took out the mortgage on that townhouse in the new development where the horse farm used to be, we can restore some sanity and balance to our lives and the rate at which the familiar is changing all around us.

But what if the choices for them (and for us) are stacked, are pre-decided to a far greater degree than we are willing to recognize? What if the matrix in which we are making our decisions is shaped by things that our puny politics can't touch, that our individual choices are grains of sand in a vast socioeconomic combine -- we might have chosen to stick to some contiguous grain to form a minute little cluster, yet some much larger force has decided to shape up into a sand castle built too close to the incoming tide. (That was a little fanciful, but you see what I am getting at.)

The point is, it may be that international capital flows have driven our consumerist microbehaviors much more than we know; that it wasn't just personal ignorance, irresponsibility, cupidity, greed and covetousness that drove the housing bubble and the boom in consumer debt; but instead those moral motives came after the fact, after our fate was sealed by the wash of investment coming in from overseas. We didn't want consumerism, but someone had to sop up all those Chinese exports. We didn't want to be in debt, but there were so many foreigners buying dollars, that the banks basically had to give money away to anybody, and who will turn down money when it seems to be offered to them for free? And if they think it sounds too good to be true, well, that's precisely what marketing is for.

Liaquat Ahamed suggests took something like this took place in the past decade in an essay in the New York Times Book Review, of all places. He taps into a sort of historical reasoning that is far removed from finger-pointing and shaming people for wanting stuff and behaving irresponsibly:

In the wake of the 1997 financial crisis there, countries in East Asia set out to build up war chests of dollars as insurance against domestic banking runs or downturns in the global economy. At about the same time, China embarked on a program of export-led growth, engineered by keeping its currency artificially low.
Interpretations of what happened next differ. Some argue that to absorb these goods from abroad while avoiding unemployment at home, the United States very consciously stimulated consumer demand. The country, in effect, was forced to live beyond its means. Others believe that the Fed misread the fall in prices as a symptom of inadequate demand rather than for what it was — an astounding, once-in-a-generation expansion in the supply of low-cost goods — and kept interest rates low for an unusually long time, which provoked the real estate bubble.

The flood of money was coming in and it had to go somewhere. If you accept this logic, the question becomes, how does a nation "very consciously stimulate consumer demand"? Is it simply a matter of sending out checks -- metaphorically dropping cash from helicopters, Bernanke style? Is it the president telling everyone to return to business as usual and start shopping, as Bush did after 9/11? Is it working ideological visions of what the good life is supposed to consist of in speeches and political campaigns? Or is it something that plays out more indirectly: Banks increase their marketing, which contributes to the promulgation of a certain view of a successful life, one that hinges on consumption rather than savings. Luxury goods makers begin trying to reach aspirational consumers, i.e. turn us into aspirational consumers. People begin to evaluate their wealth not in dollar figures but in belongings, in house size, in car size, in the extent of their credit line. I don't know what the answer is, but it seems that if there is such a throttle that can be controlled for consumer demand, we would want to seize control of it for ourselves. I never got the memo from the "Untied States" that I was now expected to consume more and like it. Instead, I ended up consuming more and felt out of control about it; I found myself spending more time in stores without knowing why and without a clue about how to reverse the trend. (This was before the government started sending out tax rebate checks to "stimulate" us all.)

Ahamed argues that the U.S. "found itself literally operating as a gigantic bank, taking short-term liquid deposits from countries with surpluses and investing the money in long-term, risky assets at home and abroad." -- I don't know if that "literally" belongs there, but the upshot is that the U.S. basically imported risk from abroad and distributed it among its citizens -- with a little creativity one could probably reconstitute this process as what Jacob Hacker has dubbed the Great Risk Shift -- the way in which middle-class people in America now have less of a social safety net. If we wouldn't take on debt and risk voluntarily, we could be forced to by the slow and steady withdrawal of social services. Goodbye Social Security, hello 401K loaded with all sorts of investments that turn out to be surprisingly dicey, like those money market accounts that teetered on the edge of buck-breaking last fall. Ahamed cites FT columnist Martin Wolf:

As Wolf traces out so well in his 2008 book “Fixing Global Finance,” the United States was able to absorb all the goods coming out of Asia only by letting its consumers go progressively deeper into debt — a process that had its own limits. Moreover, the flood of money simply overwhelmed the capacity of financial institutions to handle it. A lot, for example, ended up in the most unregulated segments of the global banking system, like off-shore deposits on the books of non-American banks. These banks, now awash with cash and desperate for places to put the money, became easy marks for American investment banks seeking to peddle securitized mortgages. When a large percentage of these loans went bad, instead of a dollar panic we had a global banking crisis.

It's hard to grasp the idea that a "flood of money" can be a problem, but that is what happens when we confuse money with prosperity -- money has to be moving to ahve value, and there can be too much of it around to keep it moving. Too much money means that the economy has become too imbalanced, that we have exceeded inherent limits, that socially useful labor has become detached from the society it was supposed to be useful for (i.e. impoverished Chinese making junk for underemployed America).

It's not clear what causes these global financial imbalances -- governmental trade policies are part of it. But individual citizen choice doesn't seem to factor in. Still, there must be reliable mechanisms by which the requisite consumer behavior is extracted from given populations. Is it some inborn greed in human nature that gets tapped into or sublimated as the situation requires? Or is it the existing class structures around the world, and the endless struggle for mobility within them (and over the signals that represent belonging) that plays the integral role? Is this the essence of the class struggle, a means of balancing international capital flows?

Anyway, if global money flows have reversed, American consumers will find the field in which they make choices suddenly changed. Suddenly they will seem thrifty and moral again, especially in the aggregate, and we can begin to generalize about what the consumption data means morally, what it tells us about how people really are. This is where a recent post by Anton Steinpilz at Generation Bubble picks up the story:Taking off from one of the dime-a-dozen "recessionista" stories about the New Thrift, Steinpilz claims that the middle classes are now "worried that their children and their children’s children will have snatched from them the exorbitant privilege of indulging their ephemeral pleasures with made-to-break trifles of sweated and immiserated workers throughout the developing world." To replace that lost privilege, they will start to loot the lifestyles of the local poor, raid their T.J. Maxxes and Aldis, and co-opt what constraints the poor have always found inescapable and make them into accoutrements and gestures, apparent trends in the hands of those classes that still might have chosen differently. When the middle class could afford to, because of international financial trends, it emulates the rich; trends have reversed, they emulate the poor; either way they remain class-signifier parasites. The rich could always contrive more positional goods to keep themselves differentiated; the poor instead (if I am reading Steinpilz correctly) find the meaning of their lives seized from them and injected into an alien lifestyle.

So, a theory: Destabilization along the boundaries of social class allows for the calibration of individual behavior with the larger demands of international capital flows, without ever allowing individuals to recognize the connection or opt out of the game without giving up the principles of personal identity altogether.

Diderot effects (2 March 2009)

The Atlantic's new business site (which it annoyingly calls a "channel") recently posted an interesting but fairly cryptic article by anthropologist Grant McCracken, looking at potential shifts in consumer behavior in the downturn. He outlines several possibilities in relation to a concept he doesn't really explain here, the "Diderot effect." Diderot, an 18th-century intellectual, wrote an essay about being given a fancy dressing gown, which made everything else he owned feel shabby to him. Thus, he explains in the essay, he needed to replace the rest of his stuff to maintain consistency among his belongings at the new level of their perceived status. The assumption is that we instinctively strive for that uniformity in our possessions -- that we want to communicate a coherent portrait of our cultural capital by having a collection of things whose meaning is readily legible to others and that don't embody too many internal contradictions. Pushing it further, we may pursue this consistency to convey a coherent sense of our identity to ourselves -- we don't know who we really are until we see ourselves reflected back to ourselves in a cogent group of possessions.

I'm a bit skeptical about this internal urge to consistency; it's possible that this tendency is encouraged by advertising and marketing efforts to promote what a coherent set of belongings should be, promulgating associations between objects to establish a society-wide understanding of what makes for the standard-issue set at various status levels. In other words, mass media advertising and the content it supports encourage the establishment of "lifestyles," the logical extension of what Diderot was writing about as a personal idiosyncrasy.

The coalescence of lifestyles may have the laudatory effect of elevating what makes for a subsistence level of consumption in our collective understanding -- it couples irrefutable necessities like food and shelter together with more nebulous goods -- education, media -- that allow people a minimal sense of social belonging. But while this minimum standard has improved in absolute terms over the days of starvation wages, recently it hasn't improved in relative terms. Income inequality has increased; barriers to social mobility have hardened. That suggests, in turn, that the distinctive goods that we use to make those class barriers known have become more visible and more inaccessible, notwithstanding the supposed democratization of luxury. That widely touted pre-crash trend demonstrated how an improvement in "real" standards can nevertheless leave social class in place. Democratized luxuries are just evident knock-offs, declassé goods that mark the inferiority of their owners to those higher in the hierarchy. The hypocritical cant about "democracy" that's evoked is a perfect example of ideological inversion -- Orwellian Newspeak.

But what happens now, with the recession leveling off all consumption? If consumption was the proimary way of policing class borders, does the fact that there will be less of it imply that those barriers have become more permeable? That more of us can pass as a member of a higher status group through clever and thrifty purchases? Will some other manner of social display more widely available come to signify status?

McCracken's post doesn't exactly deal with that question, but it gets at the microfoundations of status consumption. He offers several different possibilities for what will happen to consumption in the wake of the recession. First, everyone could scale back, leaving the existing hierarchy in place, only a lower level. Then with recovery, it will merely ramp back up. Alternatively, certain items of distinction will become more valuable and more cherished, and sacrifices will be made to hold on to the ability to purchase these specific exceptions.So rather than social class being signaled by a collection of goods, it will temporarily come to be signaled by one expensive good.

But is it possible that the new, scaled-back levels will prove "sticky"? McCracken writes,

Displeasure, as we move to a lower level of consumption, might for some consumers eventually lose its sting and turn to comfort too. Or not. The question is whether we might habituate to a lower level of spending. I think this can only happen if some of the deeper cultural drivers of the consumer culture fall silent. These would include competitive spending. (This is largely dead among some Millenials.) It would also include the wish to stay in fashion or in touch with the curve. (Here too some young consumers are turning their backs on fashion, especially the branded, mainstream variety.) There are positive forces: the wish to go green, to "save the planet," this has been the great staple of elementary school education and it is now on the verge of being installed in our culture as orthodoxy. (This is no doubt as it should be.) This is where we really have to do our anthropology: what are the cultural drivers that might intervene here and lock consumption habits into place.

I'm pretty skeptical that there are any such cultural drivers -- capitalism relies too much on competition for its dynamism for anything to override those sorts of pressures.

Happy talk (26 Feb 2009)

Over the weekend, economist Robert Shiller argued in an NYT op-ed that we basically need a stimulus package of happy talk. Distilling the thesis of his recent book, Animal Spirits, co-authored with George Akerlof, Shiller claims that "the Depression narrative could easily end up as a self-fulfilling prophecy." The idea behind this is basically the same as the one that causes economists to fret over consumer-confidence surveys. Economic behavior is guided by people's expectations, which are shaped not by rational assessments of their prospects but by their feelings (Shiller identifies these as including confidence, the ability to trust, and a faith in an economic system's fairness) which in turn are shaped, presumably, by the narrative driven by the media. If people invest, or spend, not out of strict need or want, but in accordance with how they feel about wanting, then the implication is that the media owes society some happy talk about the economy to keep up the "animal spirits" -- Keynes's term for the irreducible ambition that drives entrepreneurs regardless of their probability of success. As Chris Dillow puts it, in a review of Shiller and Akerlof's book,

given that the private benefits of innovation are low, and the probabilities of success in many arts and industry small, it might be only animal spirits that give us artists and entrepreneurs. As Richard Nisbett and Less Ross wrote years ago: "We probably would have few novelists, actors or scientists if all potential aspirants to these careers took action based on a normatively justifiable probability of success. We might also have few new products, new medical procedures, new political movements or new scientific theories."

Rational motivations are insufficient to explain entrepreneurialism. (Marx, for what it's worth, argued that technological innovation was a requirement of capitalism, which shapes would-be capitalists in its image. "Animal spirits" might be considered a ideological, pseudo-naturalistic account of that otherwise contradictory process in which insecurity and confidence merge to produce ambition.)

According to the "fragile animal spirits" thesis -- the idea that at any given moment, a culture bears responsibility for bolstering these tenuous entrepreneurial impulses -- not only do we need happy talk, but the state must take action -- passing a big stimulus package, for instance -- to try to change the public mood. As Akerlof put it in this interview with Conor Clarke of the Atlantic Monthly:

one of the things is that one of the roles of the government is to offset the animal spirits. So that when animal spirits are high -- and people are too trusting and they engage in investment projects that they shouldn't engage in -- one of the roles of the government is to offset them. More should have been done to curb the over-exuberance and excesses in the housing market. That's one. But at the same time, if the confidence then dries up, it's the role of the government to stimulate the demand that's fallen because of the lost confidence.

This sort of thinking has apparently been driving Will Wilkinson nuts. He seems to regard it as voodoo macroeconomics. "It now seems pretty plainly true that the thrust of prescriptive macroeconomics is propaganda." He adds in another post:

I’m extremely suspicious of what strike me as intellectually contentious, ad hoc interventions into the economy aimed at expectation management. Countercyclical economic mood-control initiatives seem to me inconsistent with the maintenance of a general framework of stable rules — that is, they don’t take the importance of expectations seriously enough — while also smacking of illiberal state propaganda.

Elsewhere, he cites another stimulus skeptic, economist Greg Mankiw, who writes

The sad truth is that we economists don't know very much about what drives the animal spirits of economic participants. Until we figure it out, it is best to be suspicious of any policy whose benefits are supposed to work through the amorphous channel of "confidence."

Moreover, Wilkinson argues that it's incoherent to use Depression fears to marshal support for stimulus spending: By the logic of fragile animal spirits, scare tactics hurt confidence while trying to garner support for a policy that will boost it. "The economics says we need confidence. But political reality says we need panic. So we try to induce panic so that we can later induce confidence. This seems an extremely awkward and implausible approach, but that doesn’t keep anyone from trying it." Well, now that the stimulus bill has passed, it's intellectually consistent, at least, that Shiller would take to the media to address the panic problem.

But the deeper problem here, of course, is that talking up the necessity of happy talk seems to lend support to the idea that the press should be censored for the economy's sake. Wilkinson: "If the thoughts and feelings of the population are the issue, then maybe the real problem is that the mass media are unduly scaring people. Wouldn’t it follow, then, that good economic policy would have at least as much to do with controlling the media as controlling the money supply? If the problem with handing Maria Bartiromo a script of state-mandated talking points is that it wouldn’t work, how do we know that? It would be pretty interesting if it turned out that manipulating the money supply is what an efficient state turns to when it can’t more directly manipulate 'animal spirits' through propaganda."

If reality is too scary for our fragile animal spirits, and helicopter drops and massive fiscal spending don't work to shift that reality, will we lose our scruples about the Potemkin option? Economic data could come out along the lines of how the Soviets would present data on their five-year plans. Politicians would then lie about conditions (Herbert Hoover style, as Shiller pointed out) until the populace begins acting against their instincts to hunker down as unemployment and hardship afflicts them or the people they know.

Delusional thinking about credit risk got us into this mess, so now the only thing to get us out is more widespread and more doggedly institutionalized delusional thinking? All right then! Not sure how this would help the "trust" and "faith in the system" components of animal spirits, but oh, well. Maybe if we perfect the dissemination of these delusions, we'll be free at last from those ultimately irrelevant real economic conditions, and the state can just drop in to tell us what condition our animal spirits should be in.

The "idea crunch" (3 Feb 2009)

This passage by Steve Waldman gets at the fundamental issue in recessions (and in the arguments about the stimulus package), something that the byzantine complexity of structured finance tends to conceal. This recession is not the product of some specific financial misstep or one bad class of investment so much as it is the inevitable consequence of having too much money looking for too few investment opportunities.

Ultimately, a financial system has to find productive projects for the private parties to invest in. The government can invest directly, can delegate investment to the best and the brightest, can saturate the public's demand for money until private parties try to find other means of storing wealth. But it's what real human beings do with real resources that ultimately matters. Our financial system didn't fail because it was overlevered. It failed because it was uncreative: It could not conjure up worthwhile things to do with the capital it was asked to invest, and instead of owning up to that, it pretended that poor projects were good. Financial markets are ultimately information systems. The only way out of this is to discover worthwhile things to do, or more importantly, to develop better means of generating a diverse menu of worthwhile things to do going forward. Right now, the government is being asked to do what the semi-private financial system could not: generate a positive real return on trillions of dollars of undifferentiated future claims.

He is following up on an idea that investment banker/blogger Cassandra outlined in this post: After listing a bunch of dubious investment ideas that had been launched in the bubble period, Cassandra writes, "maybe credit crunch is wrong description. Maybe it's actually a useful productive idea crunch. Maybe, we are -- for the moment -- overbuilt, over-satiated, over-consumed, and just full-up. And that is before we ask anyone for credit."

This is similar to the Marxist idea of overaccumulation. Basically, workers are squeezed out of the production process by capital investment in technology. With fewer workers, you can't extract value (no profits), since all value ultimately comes from human labor making something socially useful. "Productive projects," in Waldman's terminology, are a matter of putting workers to work on projects the world is capable of using. And, to oversimplify radically, Wall Street used financial chicanery to evade the problem of actually being productive, which allowed more capital to flow to capitalists rather than the workers who would have to be paid at some point.

Another way to look at this: Capitalism has no incentive to develop socially useful ends. The category of the socially useful, though not given by human nature and immutable, is not automatically elastic either; it needs to be fostered. (The growth of this category is the flowering of the species to its full potential.) Marx contends that capitalism, basically, fails to foster the socially useful -- that is, the pursuit of surplus value prevents resources from being devoted to developing and reproducing human capabilities so that more things can be considered socially useful. (This may be part of the answer to why don't Chinese workers consume more -- at the site of the most intense capitalist exploitation of labor, the capacity to consume is stunted both by inadequate wages and inadequate cultural capital.) The point of the stimulus package, when you abstract away from the numbers and the "shovel-ready" projects and so on, is to invest in developing the category of the socially useful directly, rather in the indirect and haphazard way private investment deals with it. But will the state will necessarily be any better at finding "productive projects" than private investors? Won't most of the money end up in pork projects and boondoggles like this? Megan McArdle argues stimulus spending should be able to pass some test of economic efficacy.

It is not enough to argue that the projects are worthy, as, say, covering the healthcare over people aged 55. To go in the stimulus package, it should provide stimulus--that is, either spur real economic growth directly, or at least convince people that it will, improving their animal spirits. Programs that do not meet these criteria should not be part of the stimulus package. There are better ways to assist the unemployed than to build a bridge we don't need. If a project won't "pay" for itself, then it should be justified on its own terms, not packaged into a stimulus so that politicians don't have to explain their choices to the American people.

But what is this test? Often we rely on sheer profitability to determine worthiness, but these investments are to a degree, by definition, non-capitalistic -- these are programs private investment wouldn't touch, and if you view that as a sign that they are inherently wasteful, all stimulus packages will be anathema to you. It seems like an investment in ideology.

David Leonhardt's long NYT Magazine article "The Big Fix" looks at this question as well. He argues that our consuming habits in recent decades constituted an "investment-deficit disorder" that left the forces of innovation crippled. Thus the government must step in with infrastructure investments.

Governments have a unique role to play in making investments for two main reasons. Some activities, like mass transportation and pollution reduction, have societal benefits but not necessarily financial ones, and the private sector simply won’t undertake them. And while many other kinds of investments do bring big financial returns, only a fraction of those returns go to the original investor. This makes the private sector reluctant to jump in. As a result, economists say that the private sector tends to spend less on research and investment than is economically ideal.
Historically, the government has stepped into the void. It helped create new industries with its investments. Economic growth has many causes, including demographics and some forces that economists admit they don’t understand. But government investment seems to have one of the best track records of lifting growth. In the 1950s and ’60s, the G.I. Bill created a generation of college graduates, while the Interstate System of highways made the entire economy more productive. Later, the Defense Department developed the Internet, which spawned AOL, Google and the rest. The late ’90s Internet boom was the only sustained period in the last 35 years when the economy grew at 4 percent a year. It was also the only time in the past 35 years when the incomes of the poor and the middle class rose at a healthy pace. Growth doesn’t ensure rising living standards for everyone, but it sure helps.

Growth is another way of saying "expansion of the production of social utility" -- people have more meaningful projects to work on and more fulfillment as a result. GDP, however, doesn't necessarily measure that kind of growth; it can't been massaged through financial manipulation, the creation of what David Harvey calls "fictitious capital." As Leonhardt points out, recent "growth" has been illusory: "Richard Freeman, a Harvard economist, argues that our bubble economy had something in common with the old Soviet economy. The Soviet Union’s growth was artificially raised by massive industrial output that ended up having little use. Ours was artificially raised by mortgage-backed securities, collateralized debt obligations and even the occasional Ponzi scheme." The fiscal stimulus could be directed at real growth to compensate for the capital destruction going on with the unmasking of the fictitious capital Wall Street had been creating.

The policy prescription that follows from this seems clear to me. The government should spend on those worthy but noncapitalistic projects that expand human potential and create public goods, and they should not spend on projects whose only purpose is to prop up asset values for those fat cats who hold vast amounts of fictitious capital. In other words, build transit systems and pay teachers better; don't bail out banks. Of course, chances are we will do the opposite.

Crisis opportunity (22 Jan 2009)

David Harvey's The Limits to Capital makes for especially interesting reading, given that he argues (extrapolating from Marx) that contradictions in "the circulation of capital" lead inevitably to economic crises that get expressed in the credit system (which had evolved, in his view, to solve lower-order crises of "overaccumulation" -- aka "savings gluts"). He looks at bubble phenomena from a Marxist viewpoint -- bubbles form when capitalist accumulation necessarily fails to achieve balance; the crises that occur when they pop are tentative, temporary solutions to the contradictions inherent in capitalism. When the capability to reinvest in capital formation is constricted for lack of viable opportunities --- when profit can't go back into making more capital -- fictitious capital is created via the credit system. That yields a speculative frenzy (since the relation between opportunity and underlying economic capapcity has been severed) that is unsustainable. So then, inevitably, there must be devaluation, to re-create opportunity in the ashes.

Perhaps that is where our economy is now. Indeed, Eliot Spitzer writes in his Slate column that we have yet to see enough creative destruction:

Although everybody claims to love the market, nobody really likes the rough-and-tumble of competition that produces the essential "creative destruction" of capitalism. At bottom, this abhorrence of competition and change are the common theme that binds together the near death of the American car industry, the collapse of the credit market, the implosion of the housing market, the SEC's disastrous negligence, the Madoff Ponzi scheme, and the other economic catastrophes of recent months.

He points to those tell-tale marks of capitalist decadence -- cronyism and rent-seeking -- and appears to be wishing for a real rain to wash the system clean. He concludes:

Both GM and the SEC need to see a change in market conditions as an opportunity—not a challenge to market share.... This is a unique opportunity for President Obama and the Congress to take two seemingly different entities and force them to play by the real rules of capitalism: compete and transform to produce better products.

It's the word force in that passage that strikes me as a bit ominous. That's probably because state repression of that sort plays a prominent role in Harvey's crisis theory. After differentiating between "periodic crashes" and "long-run problems that arise with the irreversible transformation of configurations in the circulation of capital, class formation, productive forces, institutions and so on," Harvey argues:

The latter, as Marx observed, are strongly affected by the increasing socialization of capital itself, first via the agency of the credit system and ultimately through socially necessary interventions on the part of the state. The character of periodic crashes is thereby also transformed. Instead of being the aggregate social effect of an essentially atomistic, individualized process, they become a social affair from the very outset. The state, via its policies, becomes responsible for creating what it hopes will be a 'controlled recession' that will have the long-run effect of putting accumulation back on track.
The options for the internal transformation of capitalism become increasingly limited, more and more confined to innovations within the state apparatus itself [think TARP, et. al.]. And once the limit of the state's capacity to manage the economy creatively is reached [think, the zero interest bound] the increasingly authoritarian use of state power -- over both capital and labor (though usually with far more devastating effects upon the latter) -- appears the only answer. Crises embrace the legal, institutional and political framework of capitalist society and their resolution increasingly depends upon the deployment of naked military and repressive power.

Not to get all paranoid, but this sort of argument puts Rahm Emanuel's intention to never let a crisis go to waste in a much more sinister light. Harvey reminds readers of Lenin's view of the matter, that imperialist nations can always resort to war to solve crises; nothing works better for devaluation than some wanton wholesale destruction. That may go a ways toward explaining Bush's inexplicable foreign policy. Obama has promised to end one war; let's hope the deteriorating economy doesn't force us into another.

More money, more problems (8 Jan 2009)

It's clear our economy has run into an effective demand problem: for highly logical reasons banks are loath to lend and consumers are choosing to save rather than spend. (How dare we! After so much effort has been invested in making us slavishly consume the surplus!) This WSJ chart illuminates what it has chosen to call "the frugality trap":

The chart illustrates how the U.S. economy's dependence on consumer spending has grown and grown over the past few decades, but seemed to reach a ceiling in 2001. The current crisis may be an indication that the level achieved was not as stable as it appeared, but the solution the ruling class has apparently settled on is an effort to restore that level. That's why it is a trap rather than an opportunity to reconceive our collective economic purpose. An economic reorganization to stabilize a smaller personal consumption to GDP ratio would presumably be to painful -- it would seem to mean a reduction in living standards and would definitely mean growing accustomed to acquiring fewer new things -- and politically unacceptable. Obama's proposed fiscal stimulus package (a wealth of spending initiatives and, as we've recently learned, tax cuts) is meant to try to turn the tide against this, and the stock markets anyway seem enthusiastic about its chances.

But there remains something jarring about shoveling money at people so they will buy more, particularly since easy credit, fueling heedless consumerism, helped bring the economy to this point where it requires stimulus. Economist Arnold Kling, an outspoken stimulus skeptic, expresses the problem succinctly: "from a Keynesian perspective, you always want to transfer wealth from the prudent to the profligate. But from any normal perspective, you don't." This is exactly what sticks in my craw when I think about, say, plans to prevent foreclosures. Money is being transferred from the prudent people who eschewed real-estate purchases they couldn't afford (like me) to those profligate people who trusted in the zeitgeist (made manifest in ready credit) and didn't worry about such trivial concerns as affordability. They were acting on the same principles as the bankers apparently were, if this immortal quote from Citibank CEO Chuck Prince, uttered at the height of the bubble, is any indication: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing." If the credit is out there, you're a fool not to take it, even if you know the whole thing is unsustainable. (Some of Ponzi schemer BernieMadoff's clients apparently had this view as well.) Of course, no one is taking Prince's compensation from the bubble years back since he was fired, whereas the people who danced to the music by buying overpriced, oversized houses now have to give them back to the banks.

Anyway, a Keynesian stimulus requires getting people -- anyone, prudent or not -- to spend, even if they don't "deserve" to. The need to overcome that ideological obstacle requires a strenuous effort to remove moral debate from economic policy considerations. This column by the FT's Martin Wolf is an excellent example. The most important lesson from Keynes, he argues, is

that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.
Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.

But the ideological impediment is persistent, warranting political compromise that tends to reinforce the skepticism.Paul Krugman has written a series of posts about the stimulus possibly being too small:

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Tyler Cowen makes precisely that case in advance, in economic terms: He argues that

Recovery requires that zombie banks behave like real banks, that risk premia are properly priced, and that the economy undergoes its sectoral shifts toward whatever will replace construction and finance and debt-driven consumption. Fiscal policy won’t do much toward these ends and in fact a temporarily successful stimulus might hinder these long-run adjustments.

Perhaps the ideological conundrum comes down to this: when individuals and firms spend recklessly, this constitutes their freedom (even when the need to spend feels like a compulsion); when governments do the same, this proves they are dispensable (even when government credit is universally acknowledged as necessary to maintain the economic system as we know it). How can we resent and discourage the systemic incentives to fiscal recklessness at the individual level by licensing the government to be reckless in our stead?

Spending less, buying more (2 Jan 2009)

Mark Thoma linked to this post from Susan Woodward and Robert Hall, in which they point out that though spending on consumption is down in dollar terms, consumption actually rose when the figure is adjusted for deflation.

Consumption of durable goods, adjusted for price declines

This is something to remember when hearing about how the recession is changing consumer behavior. Chances are it hasn't changed much at all; we're just buying cheaper stuff -- either taking advantage of falling prices (notice any sales this holiday season?) or substituting inferior goods.

Consumer atrophy (16 Dec 2008)

Rob Walker's column about the "new frugality" nicely skewers the concept.

We were told our willingness to spend more — on fair-trade coffee, eco-friendly totes, organic dog food — demonstrated a fresh consumer sophistication that would change the marketplace. Now, suddenly, our values are reflected in cheap shirts from Costco.
A new normal that revolves around buying lots of stuff while bragging about our bargain-hunting skills doesn’t seem to reflect changed values.

That's a good concise way of getting across something I've been trying to express but have managed only to formulate somewhat inchoately in posts like these.

Walker ends the essay on this faintly hopeful conundrum: "If there’s a deeper shift in our thinking, it’s still to come. And maybe it will. After all, the mere fact that we have managed to characterize consumer shock as frugality chic offers a perverse form of hope: That whatever happens, we’ll never lose our tendency toward optimism — even, it turns out, about our pessimism." But to be honest, this strikes me as all the more reason to be pessimistic, since optimism usually strikes me as ideologically induced naivete. It's better than being miserable, but it licenses our perpetuating in the same self-defeating practices with regard to consumerism all in the name of a dream -- that dream of finding our perfect reflection there in the world of things rather than discover it through the more arduous but more fulfilling route of making and doing. (I can anticipate the objections: Shopping is doing! Consuming is producing! I would argue that they successfully simulate those things while simultaneously promising an escape from them. Shopping has developed the alibi of plausibly passing as "self-actualizing.") I have a hard time reconciling optimism to anything but sunny yes-man-ism, and some critical scrutiny on a society-wide scale will be necessary to uproot consumerist fall-backs.

PSFK linked to this LA Times article that basically epitomizes the new dispensation on consumer behavior. The key goal for service-feature writers in the mass media is to show us how we can maintain the consumer mindset -- shopping with style for self-definition -- only without our having to spend as much (for the time being). This allows us to hold the cherished consumerist attitude in abeyance, keep it well-exercised and prevent it from atrophying while we wait for the economy to turn. Doing away with the mind-set is, of course, unthinkable.

Here, in this article, the formula is simple: Send a celebrity to a closeout discounter and watch him turn junk into magic with his imprimatur! In this case, Philippe Starck.

Famous for putting a modern spin on 18th century French furniture and for creating exquisite environments using expensive materials and craftsmanship, Starck also embraces sensible consumerism. Buy quality over quantity, he says.
"You must be very rigorous," he says, sifting through discounted wares in search of the gems. "Try to find the essence, the most iconic or simple representation of a thing. Look for the bowl that looks most like a bowl. That means we must avoid colors and patterns, and everything that can be trendy."

Starck is also worried about the kids:

"In a crisis, we have to think about our children and especially push their creativity," he says. "If capitalism is failing because it is a selfish system, we can teach them to reinvent society so that it is based on sharing."

A nice sentiment -- but what prompted this reflection? Prada green.

Starck is pleased by the store's furnishings and art supplies for kids. He picks out the aforementioned folding table and chairs, as well as sidewalk chalk, a 240-piece paint and marker set, a packet of paper in a color he dubs "Prada green" and a 10-pack of No. 2 pencils. Total: less than $50.

In general, the media-appointed style mavens always make an appeal to art and timelessness, which on its face seems ludicrous, since nothing is less enduring than fashion dictates. But the trope is important as an analogue for what is truly timeless from the point of view of the fashion industries -- that is, consumerism. The idea that we'll all reach a point where we don't care about the message we send with the "essence" of our bowls and our Prada green is too terrible for them to contemplate.

The opposite of Americans (4 Dec 2008)

In an effort to maintain its share of the export market, China has decided to depreciate its currency. (In the past, its loose peg to the dollar kept it artificially low as the dollar dropped against the other currencies. Now the dollar is appreciating, making the Chinese currency -- the yuan, or renminbi if you prefer -- stronger against the rest. That dampens demand for Chinese goods, which become more expensive.) Brad Setser explains the ramifications:

The absence of real appreciation in the past undermines China’s case for reacting to the recent renminbi move by allowing the renminbi to depreciate rather than by doubling down on efforts to stimulate domestic demand. China has by far the world’s largest current account surplus. The latest World Bank report argues, I think correctly, that this surplus should persist next year even as exports slow. China will benefit more than most from the recent large fall in commodity prices. If China is unwilling to accept that its exports will slow as the global economy slows, and instead tries to offset dollar strength by weakening the renminbi against the dollar – or it tries to offset renminbi appreciation with export subsidies – everyone else will face additional competitive pressures.

If I've understood this correctly (and I had to read it several times), China would rather intensify its competition for foreign market share than let global economic adjustments enhance domestic demand. The state is futzing with the yuan so its people won't shop more.

A few weeks ago, I wondered about the future of Chinese consumerism before, figuring that the state had its reasons for impeding it and the ideological forces consumerism would unleash. This NYT story explores the current ideological dispensation for the Chinese -- "tenacious thrift" -- and takes at face value the government's efforts to stimulate demand. From this perspective, the challenge is to overcome the paradox of thrift.

Government analysts are looking to consumers, especially the country’s hundreds of millions of high-saving peasants, to pick up much of the slack. “If we can boost people’s confidence and they spend more money, it will not only be beneficial to China but it will help stabilize the world’s economy,” Zhu Guangyao, the assistant finance minister, said last week.

But getting people to spend more, especially in the face of an economic slowdown, may be a tall order. Consumer spending makes up 35 percent of China’s G.D.P., and that number has been dropping since the 1980s, when it stood at 50 percent; consumer activity in the United States, by contrast, is responsible for more than two-thirds of the economy.

As an American, I find this hard to believe, since the desirability of spending and owning are second nature to me. They seem instinctively preferable. But of course, those instincts are my inheritance; it took a century of hard marketing work and a culture that gives pride of place to persuasion. Capitalism seems by necessity to nurture this consumer psychology; it requires that needs expand to foster perpetual growth. It requires us to regard the expansion of needs as a spiritual enrichment of our lives. But needs can only expand when they must suck up higher wages, which aren't taking off in China yet. And judging by these anecdotes, the Chineses have yet to shift their moral outlook toward spending:

Mr. Dang and his wife, Zhang Fengxia, 52, are the apotheosis of Chinese thrift. They do not use banks — “better to keep money at home,” Ms. Zhang said — and the couple’s biggest expenditure was a used tractor they bought for $1,200 a few years ago. Everything else is set aside for their retirement and for potential medical costs.
Asked if she would use a credit card if one were given to her, Ms. Zhang looked confounded. “What’s a credit card?” she asked, adding, “We have everything we need.”

...

Xing Xiuqin, 60, bragged that she managed to stash away 80 percent of her income before retiring. “Old people just need one outfit,” she said. “You should save everything for your kids.”

Contrast that with the baby-boomer philosophy, as discussed in yesterday's post. To reiterate, boomers "have raised overscheduled spoiled children, moved up the corporate ladder by pushing paper rather than making things, lived above their means in order to keep up with their neighbors, bought whatever they wanted using debt, and never worried about the future. Over optimism, unrealistic assumptions, selfishness and conspicuous consumption have been their defining characteristics."

Consumer demand in China (14 Nov 2008)

I still remember being taught in high school during the 1980s that the U.S. was superior to the Soviet Union because we could shop at the mall and choose from a cornucopia of goods while the Soviets had stand in line at gray, dreary state-owned dispensaries and basically take what they were given. The Soviet citizens envied our freedom, which is why they were always defecting and why they faced a repressive police state and fences to keep them in rather than enemies out. When the U.S.S.R. fell, many assumed that the former Soviet bloc would smoothly integrate into the global capitalist economy, greased by surging consumer demand. That hasn't worked out so well, though we still hear of the over-the-top consumer decadence of Russian oligarchs -- for example inadvertently killing their mistresses by letting them bathe in tubfuls of expensive perfume. But considering how Russia remains a bloc unto itself, it seems true that Soviet citizen weren't simply Western-style consumers in waiting, that in fact Western-style consumption is not some universal mind-set that sits dormant in all humans and is merely waiting for the opportunity to flourish as it should. It may be that the Western consumerist mentality is itself as anomalous as the Iron Curtain mind-set. What's more, those not to the consumerist manner born might actively resist adopting it.

This FT editorial about stoking consumer demand in China (also noted by Brad Setser here) got me thinking about the desirability of consumer mind-set. The FT and Setser rightly argue that from an economic standpoint, the world needs more demand from Chinese consumers. From the FT:

China’s growth to date has been phenomenal, but it was based on exports and investment, at the expense of consumption. China almost aimed to be a supersized South Korea: in 2005, capital investment made up more than half of China’s gross domestic product. The capital-intensity of its growth also meant profits grew strongly as a share of GDP. But employment growth has slowed since the 1980s, so workers have gained small benefit.
With an undervalued renminbi also making imports dear, the Chinese public has proved loath to spend. China has far too little dom­estic consumer demand. Where­as household consumption made up more than half of China’s GDP in the 1980s, it now contributes little more than a third.

Whether China wants to become more like South Korea culturally seems questionable; it's curtailment of political freedoms seems to suggest otherwise, and if the Milton Friedmans of the world are right, the procedure of fulfilling increased consumer demand habituates people to freedom of choice and leads to citizens insisting on liberty across the board. Already, no one trusts China's economic data; part of the obfuscation seems to be to conceal its efforts to manage consumer demand and suppress it. It seems probable that China, on the give-an-inch-take--a-mile principle, would want to intentionally restrict consumer demand to forestall unrest. So it keeps wages (and consumer demand) low, produces goods and sells them to the West, and then uses the proceeds to buy Treasurys and keep its currency weak (making foreign goods expensive and also pre-empting consumer demand). It pooh-poohs the West with talks of rebalancing its economy and reducing its current-accounts surplus, but takes no action. Its recent stimulus plan, as the FT argues, does little to address this. Setser adds that Chinese tax rebates on exports will only exacerbate the imbalances that are creating problems for the Chinese economy in the first place -- namely that world demand for cheap Chinese goods is falling yet the Chinese economy has little incentive to shift to manufacturing for the domestic market. (Though the Chinese government might want to consider some palliatives if this sort of thing keeps up.)

This seems to add up to Chinese government officials being reluctant to unleash consumerism in China. Perhaps they fear moral corrosion. Perhaps the ghost of Mao is admonishing them. Perhaps the Chinese people haven't effectively been taught how to demand -- maybe there is a marketing deficit there. But some attention should be paid to the political and social factors (as opposed to only the economic factors) that retard the growth of consumer demand. It may be that consumer demand can't automatically be called into being simply because economic models require it.