Tuesday, August 31, 2010

I like Robert Samuelson a lot but even my favorites can sometimes miss an important element.... namely, the role consumer confidence plays in the economy.

Samuelson writes that the "saving mentality is hurting the economy's recovery". He says people are replenishing their savings (which I believe they are) and once they've done so, they'll start to spend again... and until they've done so, the economy will continue to stagger along.

All of which is sort of right... and sort of wrong.

People don't save for the sake of saving, they save money when they're worried that their paycheck (or business income for owners of businesses) won't be enough to cover upcoming expenses. This can be the case when they're worried about losing their paycheck altogether, or when they're worried that their paychecks are going to shrink due to higher taxes, or even when they're not worried about losing their paycheck but are worried about upcoming outlays such as college or higher medical expenses.

And they'll do so as long as they are worried. Perhaps, as Samuelson suggests, there is a dollar threshold of savings at which point they'll conclude that they have enough set aside and they can return to the days of spending what they make... but my guess is that worried people stay worried and will continue to stash money and not spend it to the same extent they would if they weren't worried.

If you remove the fear, you remove the need to save. And with that, you remove a major block to the economy getting going again.

It's not just 'it's about the economy, stupid', it is 'it's all about fear'. Right now we have it... and things won't get better until we don't.