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The Stimulus that Can't Stimulate

posted by Elizabeth Warren

Hanging the worldwide economic recovery on reigniting consumer spending is like investing in used fireworks.  The pizzazz is already gone. 

How are Americans planning to spend their stimulus checks?  According to a new poll, fully 41% say they will use their rebates to pay down debts.  Another 19% are trying to protect themselves by saving it, so that 60% have no spending plans at all.  Only 7% describe new spending.  Debt is blocking a large part of any impact the stimulus package might have had.

[The rest of the breakdown:  17% will spend it on "ordinary expenses," presumably what they would have bought anyway.  No, the numbers don't add to 100%--I assume they left out 16% non-responses and didn't knows.] 

Why is paying down debt the number one objective of the tax rebate?  Take a look at at a BusinessWeek graphic that shows how consumer debt increased 2000-2007 at a rate much higher than in the 1990s.  While you are there, read the article on the powerful contraction occurring in consumer spending.

Debt is crowding out consumer spending.  A family that is paying 18.9% on a balance of $8000 has a lot less money left over for basic purchases, much less any money to buy anything new.

Alan Greenspan thought that it was great for Americans to continue spending in the 1990s and early 2000s because it kept the economy healthy.  But it didn't keep the economy--or the family--healthy. Instead, it meant that we had a false boom, growth that was financed out of tomorrow's earnings.  Now the bills are coming due.   


This is an extraordinarily powerful and important insight -- yet one that will likely fail to permeate the media echo chamber more focused on haircuts, cleavage, orange juice and the uses of the word 'bitter'.

Thanks to the destructive and empirically wrong ideology of Milton Friedman, Alan Greenspan and others, we've shifted the foundation of our economy from a focus on wages and productivity to a focus on asset prices and borrowing. The real wages of all but the top 20% of households have stagnated/declined for more than three decades. Instead, we've promoted asset bubbles and indebtedness as a path toward wealth transfer from below to above.

Or, put differently, instead of wages for increasingly productive work, those running our economy have promoted borrowing for consumption and covered their tracks through combining heavy financing and lower prices both from abroad.

Cui bono?

I second that reply. Ya! Whose advantage? Is the stimulus for the consumers or for the marionettes’? Never mind big biz, they might get a boost if consumers do the wrong thing “spend”. Are the ones pulling the strings taking the advantage? Are brownie points given to our elected officials in pacifying big biz and making it look like it’s for the consumers benefit? Don’t get me wrong, we need it but the way inflation is running (gas, milk, wheat) it is just going to sink to bottom of our gas tanks. Just seems like a band aid to me. Is an extra $800-$1600 really going to turn things around for an individual or family in the long run? I think we need more. We can’t go on financing gas, food and medication, which is what most people are doing. Most people are not truck drivers. They don’t get reimbursed for gas.

I pay quarterly estimated taxes, so when I get the $600 stimulus, I'm just going to be sending it right back anyway. :(

The so-called stimulus is a terrible idea, given that the government is uncontrollably addicted to deficit spending (rather like tapped-out consumers). How about some confidence building maneuvers like actually getting control of the budget deficit, reducing inflation, strengthening the dollar, etc. Painful in the short term but what we need to do to restore fiscal sanity, rather than digging ourselves in deeper.

I don't think Uncle Milton would look very kindly on our recent fiscal and monetary idiocy.

Hey Mogden. Take a look at this http://articles.moneycentral.msn.com/Investing/JubaksJournal/USDeepInDebtAndStillDigging.aspx Seems you and Jim think the same. I have to agree.

I'm no economist, but it seems to me that American business is now reaping what it's been sowing for years by refusing to share profits with its workers through higher wages. Consumer spending kept chugging nevertheless because of easy credit and the housing bubble, which allowed people to pull the equity out of their homes and keep spending, even though their wages were flat. Guess what? Now the housing bubble has burst, the equity is gone and the credit cards are maxed out. With prices of necessities rising, that flat paycheck can barely cover them (if that). The consumer economy is built on encouraging the purchase of "wants"---buying only "needs" won't support it. And there's no money left for "wants" anymore. Corporate America's chickens are coming home to roost.

I'd rather the government keep my stimulus check and invest it in something that would have much more value, meaningful legislation that actually held lenders accountable and allowed people to have new tools to fairly and reasonably deal with their debt.

The most effective cure is to reduce the usurious interest rates to a historic norm for all consumers.

Our Trend Model moved us into Euros over four years ago based on the Federal deficit and the increase in consumer debt at rates above prime. The spread between the prime rate and the average consumer debt rates - the usury factor - is a key indicator of financial instability of a society as the controlling bankers (supported by their entourage of lawyers, accountants, judges, and other non-productive functions) usurp the buying power of the local workforce to maintain theirs.

Absent the Iraq war and the Fed deficit, the usury factor would have been obscured by stability of the dollar and low inflation from the consequent stability of oil and commodity prices. The stability of the dollar would have also checked home prices - which could have checked the mortgage excesses (if historic levels of capital were required) which contributed to the asset and credit bubble.

Today, with the low dollar, balancing the budget by increasing upper income taxes, controlling spending, lowering the consumer credit rate is likely to transform the economy by encouraging investment in plants, production while maintaining a modest level of consumer spending.

However on the current course, it will not turn around without a greater dollar decline and massive defaults by consumers.

Clearly, without a balanced budget, the 60 year dominence of the American Empire is over.

I just heard an announcement that direct deposit checks will show up as early as this coming Monday. And what am I going to do with mine? You guessed it, pay bills.

I just heard an announcement that direct deposit checks will show up as early as this coming Monday. And what am I going to do with mine? You guessed it, pay bills.

I hear ya Matty! Got to get my Explorer up to par with my "stimulation" check. Maybe then it will stop sucking so much gas and last until I can pay it off next year.

1) consumers are spending their extra money on gas. they don't have as much to spare as they used to. 2) minimum wage rate increased but I'm still paid the same. the bottom of the bottom raises up, good, but the bulk of us are being paid the same as the cost of living keeps going up and up. 3) gas prices affect everything. if it costs more to ship something to a store, the price at that store must go up also. higher prices means consumers can and will buy less.

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