'Tis the Season, But Should We Save or Spend? A Holiday Money Conundrum
RAY SUAREZ: Retailers are hoping to finish the holiday shopping season strong, particularly given some forecasts warning of a slowing economy in 2013.
As we reported earlier, consumer spending helped spike better growth this fall. But in light of the last recession, some are asking whether less personal debt and perhaps some more austerity might be a better approach.
NewsHour economics correspondent Paul Solman has been exploring that question, part of his ongoing reporting on Making Sense of financial news.
ACTRESS: The economy is just terrible. I'm really worried about our future, honey.
ACTOR: I'm spending just as fast as I can to stimulate the economy. Uh-oh. I just maxed out my credit card.
ACTRESS: Here, use mine. The economy can use all the spending it can get.
NARRATOR: Stop right there.
PAUL SOLMAN: Just in time for the holidays, a new video from the folks who created the Keynes-Hayek rap, which we have featured in the past. This may look like a Keynesian Christmas carol, pushing consumption to boost the economy, as English economist John Maynard Keynes long ago advised.
MAN (singing): If you want a recovery, buy toys, mountains of toys.
PAUL SOLMAN: In fact, it pitches the exact opposite: saving as the path to prosperity, as sung by Keynes' conservative rival, Friedrich Hayek.
MAN (singing): Delaying consumption of goods today, a better tomorrow we pave. If growing prosperity is our goal, the best thing we can do is save.
PAUL SOLMAN: In real life, Hayek's Austrian austerity is much in vogue these days. Spending is suspect, especially if it means going into debt. Savings are our salvation, since they are invested and will thus grow the economy, to which Rutgers economic historian James Livingston says, bah, humbug; such Scrooge-like logic belongs mainly to Christmas past.
JAMES LIVINGSTON,RutgersUniversity: For 100 years now, growth has been driven by consumption. So, to say that we need to increase productivity by more savings and more investment is to violate, it seems to me, the historical evidence.
PAUL SOLMAN: In fact, Livingston says, consumer spending represents some 70 percent of all economic activity, and it is thus the key to commerce.
At New York's Grand Central Terminal, the holiday fair, where the vendors corroborated the economist.
ANASTASSIA GONYE, Tuff Cookie Clothing Co.: You cannot grow an economy without, you know, good consumerism, you know?
PAUL SOLMAN: As an immigrant from the former Soviet Union, Anastassia Gonye has lived the alternative.
ANASTASSIA GONYE: I stood in line for bread, so there wasn't enough of things that are necessary to survive. You know, I had to make things for myself. That's how I started my -- that's how I learned that skill, because I had to make clothes myself, if I wanted to look halfway decent. So, it's different, you know?
PAUL SOLMAN: But this is better than...
ANASTASSIA GONYE: Of course it's better, way better.
NARRATOR: Russia, October 1917.
PAUL SOLMAN: The Soviet planned economy grew out of the Communist Revolution of 1917. But in the U.S. back then, the market reigned, channeling wealth to its most productive uses. The new infomercial thinks that that should still be the model.
NARRATOR: Increasing productivity needs more savings and investment, the true engine of economic growth. Now, hear Friedrich Hayek sing a song of savings.
MAN (singing): Your savings are borrowed by businessmen. Production's structure is changed. They invest in workers and capital goods, our economy rearranged.
PAUL SOLMAN: But, in a recent book, "Against Thrift," Livingston shows that private investment, as a percentage of the economy, has actually been dropping, steadily, since the 1920s.
JAMES LIVINGSTON: I wouldn't say we don't need private investment at all, but we have to acknowledge that private investment doesn't drive growth.
PAUL SOLMAN: But the new drug that requires all this money for clinical trials, what I have got in my pocket, this amazing device, that doesn't require investment?
JAMES LIVINGSTON: Most of those clinical trials, most of that kind of investment is a public-private partnership. What you're holding in your hand, it seems to me, is a perfect example.
That is, government spending, public spending has driven the research and development that allow for the development of this smartphone. We should acknowledge that. It's created jobs, and it's created growth as well.
PAUL SOLMAN: Yet, says Livingston, we scorn government and glorify the private sector, extolling productivity and hard work. Yet, we live in a country where productivity makes work hard, all right, hard to come by.
JAMES LIVINGSTON: We can develop all kinds of technologies. If there's not sufficient consumer demand to buy the goods, then what? Then what happens? Then we have stagnation. Then we have economic crisis, which is what we have got on our hands now.
PAUL SOLMAN: But we're borrowing more in order to spend. Isn't borrowing a problem?
JAMES LIVINGSTON: Who's we, consumers or the government?
PAUL SOLMAN: The government.
JAMES LIVINGSTON: OK. The government is borrowing more and more. Why? Because there's not enough growth, right? There's not enough taxes coming into the coffers, so it has to borrow more.
If we can reinstate growth -- and everybody agrees on this -- if we can reinstate growth, we're going to be fine, fiscally speaking. The question is how to reinstate growth. If you believe Hayek, it means more saving, more investment. If you believe me, along with Keynes and a few others, no, that's not what we need.
PAUL SOLMAN: We need to spend more.
JAMES LIVINGSTON: We need to spend more. And that's why we're here.
PAUL SOLMAN: But consumer stimulus isn't the only reason Livingston pits himself against thrift. He also thinks buying something is liberating.
JAMES LIVINGSTON: It's the idea of freedom that stands behind it. It's, what can I do with this thing, what can I do with this good? That's what people buy things for. Or they're buying gifts to cement social bonds and create an emotional climate.
PAUL SOLMAN: So you think of shopping as a form of self- actualization?
JAMES LIVINGSTON: Yes. Shopping, consuming, that is at least as self-actualizing as producing or working, yes.
PAUL SOLMAN: Retail therapy, in theory, and here in practice.
Do you get genuine pleasure, joy out of shopping, or do you feel guilty because it's consumerism?
CARMEN TRIPETO, shopper: Oh, no.
WOMAN: Enjoy it. She definitely enjoys it. I enjoy it as well.
CARMEN TRIPETO: I definitely enjoy.
PAUL SOLMAN: How do you enjoy it? What do you enjoy about it?
CARMEN TRIPETO: Because I buy some present for the rest of my family, my girls, and make me happy when I give something new.
PAUL SOLMAN: The sellers often seemed as self-actualized as the buyers. Elissa Ehlin makes copper and enamel jewelry with her husband, Jay.
ELISSA EHLIN, Owner, Kiln Design Studio: I do not sell online. I do not sell in stores. I sell my work in person, through museum shows and fine art and craft shows.
PAUL SOLMAN: How important a part of your business is that, or are you just an artist?
ELISSA EHLIN: No. The actual interaction with the person who is buying a piece of work from Jay and I, you can't even put a price on it.
JAMES LIVINGSTON: This is creating social bonds, right? It's about creating an emotional climate. It's not about the exchange of goods only, right? For me, that's what consumer culture is about.
PAUL SOLMAN: To many, if not most, Americans, though, this is what it's about, at least come the holidays. And this is what it looks like year-round.
Verizon ads popping up all over the place, Baileys Irish Cream whiskey, advertisers trying to manipulate us, to make us buy now, to think we want something that we will later be unhappy with. That isn't all true?
JAMES LIVINGSTON: I think it's actually mostly untrue. Most consumers know perfectly well what's going on with advertising. They realize that what they're buying when they pay attention to advertising is not the thing itself. It's the idea of freedom that goes with the thing. Consumers are very, very savvy in that respect.
PAUL SOLMAN: You sound like my marketing professor at HarvardBusinessSchool in 1976, literally.
PAUL SOLMAN: That's what he said, that it's not the product you're buying. It's the aura of the product.
JAMES LIVINGSTON: Right.
PAUL SOLMAN: It's the status that you think is being conferred on you by the product.
JAMES LIVINGSTON: Right. Right.
PAUL SOLMAN: You actually buy all that?
JAMES LIVINGSTON: Most definitely.
PAUL SOLMAN: But even if your answer is, most definitely not, you might still buy Livingston's Keynesian prescription, that when unemployment is high, consumption is the only antidote.
On the other hand, you might instead be swayed by the anti-spending, pro-saving message of the libertarian Christmas video. Its young protagonists certainly were, as are many Americans these days.
ACTOR: If we save more today, we can have an even better holiday tomorrow.
ACTRESS: And maybe we can even pay for my college tuition.
PAUL SOLMAN: Who could disagree with that? James Livingston.
JAMES LIVINGSTON: They're making a mistake not only at the level of the family. It's also bad for the economy.
PAUL SOLMAN: We, of course, take no sides. But we don't mind if you thank us, should you be splurging this season, for providing you with a possible excuse.
MAN (singing): If you want a sound recovery, buy toys.
RAY SUAREZ: Who knew Keynes could carry a tune?
Online, you can watch the entire economists' Christmas carols video. That's on the Business Desk.