December 11, 2001

SPEND OUR WAY TO PROSPERITY?

Dear Friends and Subscribers,

Former First Lady (and current First Mother) Barbara Bush spoke at the New
Orleans Investment Conference I attended last weekend. Her charming
demeanor, self-effacing modesty, homespun wisdom, and disarming sense of
humor delighted the audience, as she talked about everything from
veterinarians and taxidermy to cosmetic surgery and prayer. Some of her
jokes were of the "tried-and-true" variety, but they were delivered with a
freshness that made her retelling of them forgivable, and enjoyable.

She talked lovingly and admiringly of what it is like to be the wife of one president and the mother of another. One of the most important messages of her talk was almost accidental, an ironic truth hidden within a joke. With a twinkle in her eye she said, "My son the President told us to go out and spend, to help get this economy going again. So I told my husband, the former President, that I was going shopping, to fulfill my patriotic duty. He replied, 'If you want to be patriotic, just go out front, hold hands, and sing God Bless America!'"

I suspect many families are having similar conflicts of direction this
season. Our hearts say "spend," but our heads say "be cautious." Much as I admire George W's leadership during this international crisis, I'm less enthusiastic about his domestic program. I have to agree with George the First on this issue: If something is bad for us as individuals, it can't be good for us as a nation. Yes, it would be nice if we could all run out and buy matching blue bicycles for our children and grandchildren. It would be nice if we could buy matching blue bicycles for the whole neighborhood! But in these uncertain times, going into debt to buy unnecessary baubles and trinkets for family, friends, and business acquaintances to unwrap and exclaim over is decidedly NOT patriotic. As commodity trader and investment writer Ian McAvity wryly observed after Mrs. Bush's speech: "This is the first war to be fought with credit cards!" And with credit cards as weapons, it is a war we are doomed to lose.

This "spend-our-way-out-of-a-recession" solution is not new. It was first proposed by economist John Maynard Keynes in the 1930s, and has been adopted by virtually every administration since. Keynes believed that the reason for the Great Depression was that people stopped spending, rather than recognizing that people stopped spending because of the depression. He considered saving to be bad for the economy because, as he saw it, saving took money out of circulation. Spending, on the other hand, injected money into the economy, putting shopkeepers, clerks, gas station attendants, movie ushers, toy manufacturers, and textile mills back to work.

But this analysis was superficial, focused on what is seen but ignoring what is unseen, as Frederic Bastiat would have pointed out. Money that is saved does not simply disappear from the economy, hidden in a coffee can or under a mattress. It is injected into the economy through different paths, either as investment capital or as consumer expenditures at a future date. Money saved in a bank can be loaned to other customers for home mortgages, college tuition, or to start a business. Money invested in stocks or bonds can be used to upgrade equipment, develop new products, and expand inventories. Money saved by a family can be used in the future to buy a car or pay a child's tuition, or simply to see the family through hard times. Instead of spending our collective money on fruitcakes and video games that are immediately consumed, saved money can be invested in technology and infrastructure for long-term improvement and eventual consumption.

Let's take George the Second's spend-ourselves-out-of-trouble scenario to its post-Christmas conclusion. What is the immediate result of our buying a truckload of hypothetical blue bicycles at Christmas time? Retailers send rush orders to the Schwinn company for additional bikes. When Schwinn is unable to satisfy all those new orders, it happily goes into production producing more bicycles. Workers get overtime pay, and some new workers are hired. Steel and rubber producers also benefit modestly, as orders for raw materials to make tires and fenders increase. Of course, the cost-per-bicycle increases to accommodate all the rush orders and overtime expenses, and the profit per bicycle recedes (or the price is passed along to the consumer). But that's okay--at least we're spending, and people are working.

Meanwhile, retail companies, overwhelmed by the bustle of customers, hustle to hire new sales clerks. Then, based on income expectations from their new jobs and overtime pay, employees rush out during the week before Christmas to buy more gifts and decorations than they otherwise thought they could afford, using credit cards that will be paid in future months with the money anticipated from their new jobs. Sounds good, doesn't it? That's the reason behind W's push for us to spend.

But now let's move into January. The bicycles are in the garage, waiting for the spring thaw, and even in Florida, boys and girls are complaining that they can't ride a bicycle to school because the helmet will mess up their hair. Everyone who ever had an inkling of buying a bicycle (or anything else, for that matter) has already done so, and the spending frenzy simply cannot be maintained. Retailers experience a slump. Most hourly workers are laid off, and even salaried employees begin to worry about job security, as money that the company might have spread across the slower winter months had to be spent on temporary workers and overtime during the December rush.

Managers at the Schwinn company are wondering what to do with all these blue bicycles that are piling up, unwanted after December 24, in their warehouse. No new bicycles will be ordered for several months. Newly hired workers are let go, to join a growing work force of seasonally adjusted recipients at the unemployment window. At his State of the Union address President Bush once again urges a nation of patriots to thumb their noses at the terrorists by spending and spending some more, but the money is all gone and the credit cards are maxed out. Even the wealthy are feeling the pinch, having been swept along by the tide of holiday cheer, and money they might otherwise have given to charity to help the jobless, or simply to keep paying their current employees, has already been spent on fruitcakes, office parties, and blue bicycles.

I'll say it again: If something is bad for us as an individual, it can't be
good for us as a nation. We need a citizenry that is financially secure, who can ride out this recession by tightening their own belts and eating from their own larders, not a citizenry singing God Bless America as they line up at the bankruptcy court and unemployment counter.

Some years we can be lavish, other years we need to be frugal. This should be a season of practical remembrances. I'm not a humbug, and I love the Christmas season. But we can be practical and personal, festive without being frivolous. When asked for their Christmas wish lists this year, my children were amazingly practical. A daughter asked for kitchen supplies; a son needs some equipment for his business. One of my sons asked for shirts, pants, underwear, and batteries. No kidding!! (Lest you think they are all saints, the youngest did ask for games, videos, clothes, makeup and a cell phone..)

So here is my counter suggestion to President Bush's spend spend spend philosophy:

If you really want to be patriotic, make sure you won't become a burden to your family or to society.

Make yourself indispensable at work, so if layoffs are in your company's future, you won't be among them. Arrive on time, work efficiently, be helpful, productive and innovative. To paraphrase JFK's speechwriters, "Ask not what your company can do for you, ask what you can do for your company." You won't help the economy by drawing an unemployment check.

Make yourself affordable. If you are an owner, cut prices, offer sales and discounts. If you are an employee, work extra hours for free, take a reduction in wages, accept reduced benefits. When the recession is over, you'll be able to raise your prices and requirements again. Don't make it worth their while to find alternatives! Keep your customers coming.

Make debt reduction a priority, even at holiday time. I'm reminded of a wise mother who rallied her children to give their father a most unusual gift one year: peace of mind. With her children's approval and support she used all of her Christmas budget to pay off some pressing bills, then wrapped the receipts in a beautiful box for her husband to open on Christmas Eve. The next morning they all slept soundly and late, then spent the day playing games, reading stories, singing carols, and enjoying their time together.

Establish a regular savings program. George Clason wrote in The Richest Man in Babylon, "a part of all you earn is yours to keep." Pay yourself ten percent of what you earn, and do it as soon as you get paid, not after you see what is left over. Better still, make it automatic, by having money deducted directly from your paycheck or savings account.

Invest wisely. In these uncertain times it's good to diversify. Continue subscribing to Mark Skousen's Forecasts & Strategies, and call the hotline each Monday to hear his latest update.

Spend what's left over, but always use cash for consumption goods. You don't have to be a miser, you just need to be prudent.

Carry a wish list in your wallet so that every time you are tempted to buy something, you see that list of things you are saving for. Then ask yourself, Do I want this impulse item more than I want what's on my wish list? More often than not, you will put the wallet back in your pocket and leave the item unpurchased at the checkout counter.

Use common sense. If President Bush's recommendation to spend our way out of the recession seems too good to be true, that's because it is. But if each of us does what is fiscally best for ourselves and our families, it will also be best for our nation as a whole. That just makes sense.

Make this a season of peace. Seek peace of mind, even if we are not at peace as a nation. Make peace with family members who have become estranged, or with neighbors or coworkers who may carry a grudge. Become known as a peacemaker among your circle of friends. Such a gift is worth far more than money can buy, and reflects the true meaning of this wonderful Holy Day season.

-- Jo Ann Skousen

email: jaskousen@mskousen.com

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