Monday, November 09, 2009


Our American lives (and likely those of other countries as well) are driven on consumption. Depending on your perspective, this can be a good or bad thing.

Life in general is about consumption. We live to eat, the most basic consumption. We work to get the things in life we think we need. When we are poor those needs are pretty basic. When we are wealthy are basic needs are met so we consume with 'discretion'. In other words, we consume other non-necessary goods to the extent that it does not interfere with our base needs.

I should define base needs as items such as food, shelter, and the items needed to obtain and keep those items.

After writing my last blog post about Social Security I did some more reading and found a study that discussed what would happen if Social Security was simply removed. It's major finding was that discretionary consumption would be reduced, both at retirement and leading up to it. Suggesting that though we'd pay less in taxes we'd have to put more into our personal retirement savings, since it was now solely our responsibility, that we'd ultimately spend less. Additionally it suggested we'd have less money at retirement, so we'd spend less then as well.

Since our economy is based on consumption, this model suggests doom and gloom for our economy. Less consumption, means less jobs, which means less money and more unemployment.

The problem I see, and it's reared it's ugly head twice now in the last decade, is that this creates market bubbles. Economic growth is only sustainable to a point. Things have to level off at some point. If everyone actually looked at their needs/wants, there are a lot more wants than needs. If everyone was happy with what they had then the markets would fail and businesses would drop off because of that. That's what we are seeing now. Unfortunately instead of saying, "Maybe the market isn't strong when we get to a certain height," we try to figure out how to tweak the system so as to get a bit more money out of it, even at the risk of society.

The housing boom is a great example of that. I'm sure there were buyers who bought within their means and bought homes that met their needs, but there were also a large percentage of buyers who bought more house than they needed with the idea that they'd turn around and resell it in a few years and make a large profit. They assumed there would be people continuing to consume. The problem is that once the houses got to a certain point people stopped consuming because the prices were too high. The ones at the top of the heap suddenly couldn't sell their houses. They foreclosed because they couldn't afford the payments. And like a house of cards the market fell apart, because it was based on ever increasing consumption. It was also spurred by mortgage funny business. Chopping up bad mortgages and selling them on the market in 'creative' ways allowed the housing market to see more aggressive growth than would have been the case otherwise. It's not that the market was bad before, but consumption was not growing at the rates that people wanted, so an artificial mechanism was created to spur growth.

Looking back now consumers were duped by great marketing and greed. Though the creative marketing and finances by the banks is part to blame, the responsibility ultimately lays with the consumer who didn't know when to say when.

This is happening in China now too, at the cost of health and traditions. Individually we know what is right and wrong with consumption but as groups we make the same mistakes over and over. The herd is not very smart typically. Yet when individuals stand up against those poor choices they are often ridiculed.

I'm not saying I'm innocent of 'want' consumption. I have plenty I don't 'need'. That is partly why I do things for others now, because my needs are met. I also evaluate my consumption on want vs. need. I didn't always, but I do now. It's not an easy lesson to learn, but one more people should try to learn. I'm also not advocating that people can't have wants or that discretionary spending is a bad thing. I am saying that it needs to be balanced and reasonable. What that means will be different for each person. I'm sure there are some who would argue that they 'need' a yacht. I'd disagree with them but it's also their money.

The "consumption" economy may suffer a bit if we saved more and consumed less, especially at first, but society as a whole would be much better off.

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