Mall Rats Can’t Bring About the Wealth of Nations: Caroline Baum

Illustration by Hieronymus Close

Illustration by Hieronymus

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Illustration by Hieronymus

The spectacle of hordes of shoppers schlepping through the mall at midnight with children in tow, stuffing their carts after stuffing their bellies, was a sight to behold. And apparently one to cheer.

U.S. stocks soared on Monday following reports of a bang-up start to the holiday shopping season. Black Friday sales rose 6.6 percent from last year to a record $11.4 billion while “retail foot traffic” -- now there’s a metric you can take to the bank -- rose 5.1 percent, according to ShopperTrak, a Chicago research firm.

The National Retail Federation said U.S. shoppers spent a record $52.4 billion during Thanksgiving weekend in stores and online, a 16 percent increase over last year. Online sales soared 33 percent on “Cyber Monday,” according to IBM. The market-research firm comScore Inc. said it was the single- biggest online-shopping day in U.S. history.

Consumer spending accounts for about 70 percent of U.S. gross domestic product. As the consumer goes, so goes the nation.

Not so fast. Consumer spending constitutes growth to the extent that consumption, or C, is a component used in calculating GDP. (GDP = C + I + G + X - M, with I representing investment, G government spending, X exports and M imports.) Today’s spending boosts GDP growth in the current quarter.

Today’s investment boosts current-quarter GDP as well, but it doesn’t stop there: Today’s capital investment gives rise to tomorrow’s potential growth.

Wealth in Savings

Whether last weekend’s sales were as strong as retail groups made them out to be or whether they augur a trend is beside the point. The wealth of nations comes not from what we spend but from what we sow: what we set aside to be invested in productive capacity.

If spending created wealth, Greece would be rich. Neither consumers nor governments can spend their way to prosperity.

The hoopla over Thanksgiving weekend sales, disseminated via TV, print and electronic media, surely sets the U.S. apart from other Western nations. And don’t get me started on that season-of-giving malarkey. The Christmas-shopping bonanza long ago became divorced from any religious or spiritual significance the holiday may have.

It’s not clear that opening stores three, six or 12 hours earlier than normal on Thanksgiving weekend results in stronger holiday sales, either for individual stores or for retailers overall. Households on limited budgets determine how much they will allocate to gifts for friends and family. Where and when they do their shopping is secondary.

Besides, there is something fundamentally wrong with a culture that promotes spending as the key to health and wealth. A multidecade borrowing-and-spending binge whittled the U.S. savings rate from an average of 9.6 percent in the 1970s, to 8.6 percent in the 1980s, to 5.5 percent in the 1990s, to 3.3 percent in the 2000s. At one point during the housing bubble, the savings rate approached zero.

My generation learned about the virtues of thrift from our parents, who were children of the Great Depression. Subsequent generations haven’t had the benefit of real-world teachers. For them, the 1930s are a story told through sepia-toned photographs of ravaged dust-bowl farms and bread lines.

Younger generations of Americans have grown up on conspicuous consumption. The focus has been on what something costs today -- the monthly interest payment on the credit card or mortgage -- not whether the car or home is affordable. Easy and cheap credit made it all possible.

Incentive to Spend

The Federal Reserve is complicit, too, in discouraging saving by holding its benchmark rate close to zero and pledging to keep it there at least through mid-2013. Consumers aren’t getting paid to save. The rate they can earn on bank deposits is negative when adjusted for current or expected inflation. Therefore, they spend. High real rates induce consumers to forgo current spending and save.

Households have been deleveraging for three years in an attempt to repair their balance sheets. Yet many economists and policy makers advocate more borrowing and spending as a cure for what ails the economy, and cheer as mall rats infest stores in the middle of the night. How can that be?

I suspect it’s the old short-run/long-run dichotomy. By now, though, it should be obvious that the U.S. suffers from an extreme case of short-term thinking, and it underpins decisions on everything from tax-and-spend policy to monetary policy.

Even the stock market applauds more “consumption,” a synonym for spending I try to avoid. A former editor said the word made him think of people wasting away from tuberculosis, which happens to be Merriam-Webster’s first definition. It was enough to convince me.

In the context of this column, however, the alternate definition seems appropriate: “the utilization of economic goods in the satisfaction of wants ... resulting chiefly in their destruction, deterioration, or transformation.”

“Destruction” should be a tip-off that whatever it is, it isn’t wealth.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this article: Caroline Baum in New York at cabaum@bloomberg.net.

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net.

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