Economic Historian Says Spend To Save The Economy (And Your Soul)

Author James Livingston. (Bruce E. Williams)

James Livingston has been listening to the debate over the economy with an historian’s ears.

He says that while there seems to be a deep divide, politicians and economists on the left and the right are actually pushing the same idea – that business holds the key to growth. But Livingston says history tells a different story– consumers actually do.

He says the numbers show that since about 1910, “business investment has not been the driver of the economy, consumer spending has.”

That’s in part because of technological change, which makes it much cheaper for businesses to increase productivity. Businesses and the wealthy cannot possibly re-invest all the extra money they have into growth, because that would make more products than any society could possibly use.

Livingston says policies that encourage savings and higher business profits have created large pots of money with nowhere to go, so businesses and the rich plow them into the financial markets, creating the cycles of bubbles and market crashes we’ve seen since 1929.

“Once upon a time, saving for a rainy day served the purpose of building character, and the economy,” he told Here & Now‘s Robin Young. “That’s no longer true.”

Livingston argues against policies that encourage private saving and for policies that take money from corporate profits and put it into the hands of consumers.

New York Times: It’s Consumer Spending, Stupid

Book Excerpt: Against Thrift: Why Consumer Culture is Good for the Economy, the Environment, and Your Soul

By: James Livingston

THE DOWNSIDE OF THRIFT

We’re the most afﬂuent people on the planet, us Americans—our choices among foods, ideas, clothes, schools, and destinations are almost without limit—and we love to shop. But we also know that consumer culture is bad for us. How come?

In a word: excess. We’re afraid that we consume too many resources, that we save too little of our incomes, and that meanwhile we produce almost nothing of real value.We’re afraid that we can’t observe any limits on our consumption of goods, so that every substance, even food, begins to feel addictive, and every urge, even sex, begins to feel compulsive. When armed with credit cards, it seems, we’re unwilling to defer the immediate gratiﬁcation of our desires, and we’re thus unable to “save for a rainy day.” We’re also afraid that we’re mere cattle—herded by corporations and “branded” by their admen. We’re especially afraid that consumer culture is making us fat.

So, yes, we love to shop, most avidly between Thanksgiving and Christmas. Still, we know that in the long run, consumer culture is bad for the economy, the environment, and our souls.We sometimes express this split in our personalities by complaining about the “commercialization” of Christmas, typically when we’re ﬁghting crowds of last-minute shoppers. More often we apologize to ourselves, among others, for buying things we didn’t really need, or for indulging a child’s ad-induced desire for a molded plastic toy that will never decompose. Complaining or apologizing, we’re divided by very different orders of feeling. On the one hand, we experience the pleasure of buying, using, and giving away the things on the shopping list. On the other, we know without thinking that the same things already contain a barbaric history of exploitation— “Made in China,” the label says—and foretell an ugly future of mountainous landﬁlls.

In this book, I make the case for consumer culture: why it’s actually good for the economy, the environment, and our souls, among other things. In this sense, I’m trying to heal the split in our personalities by demonstrating that less work, less thrift, more leisure, and more spending are the cures for what ails us.

So I make two basic arguments: one about the economy and the other about the culture, using a strategy that keeps me coming back to the historical record.

First, sustainable economic growth doesn’t require more saving by households and more investment by CEOs, bankers, traders, and fund managers. In other words, more consumption is the key to balanced growth in the future. That’s right: we need to save less and spend more. Just to begin with, a much larger dose of consumer spending is absolutely necessary to prevent the kind of economic catastrophe that still racks the domestic and international economies. That new dosage requires a redistribution of national income away from proﬁts, which don’t always get invested, toward wages, which almost always get spent. This new course of treatment does more than invert the supply-side cure for our economic ailments—cut taxes on proﬁts, let private enterprise prevail!— because it assumes, in view of the historical record, that proﬁts won’t be productively invested. That’s right: higher proﬁts almost never lead to more investment, more jobs, and more growth. In fact, there’s no demonstrable link between private investment and economic growth, so cutting taxes on corporate proﬁts is pointless at best and destructive at worst. We might as well stop pretending that there is such a link.

Second, consuming goods is as morally complex and signiﬁcant as producing goods. Making things—the work that requires tools and skills and time—is no more meaningful than buying and using things. In fact, work as such is less important than, say, buying and driving a car, or choosing and wearing that little black dress. (It turns out, in any event, that the kind of work we typically imagine as the obvious alternative to The Mall is what we do at our leisure, after hours: it’s already taken up residence in the neighborhood of consumer culture, where you don’t get paid for what you produce.) As part of this polemic against work— against alienated labor—I demonstrate in Chapters 5 and 6 that consumer culture doesn’t siphon political energies and fragment social movements by “privatizing” experience: instead it grounds a new politics by animating both new solidarities and new individualities. In the same spirit, I show in Chapters 7 and 8 that advertising—the headquarters of consumer culture—speaks the last utopian idiom of our time because it urges us to create identities unbound by work.

Guest:

James Livingston, professor of history at Rutgers University and author of “Against Thrift: Why Consumer Culture is Good for the Economy, the Environment, and Your Soul.”

We welcome comments from all of our listeners. Post below. Please stay on topic and be civil. Comments may be moderated by us, but you are solely responsible for the content of your comments.

Roddy

Thanks so much for having this guy on for extended interview. Read chapter on Amazon and looking forward to getting ereader for Xmas. This is most interesting take on economics I’ve seen this year. Things are always more complex than Boehner/McConnell would have you believe.
- Anonymous
  
  For a parallel approach to learning about economics, particularly macroeconomics, regularly (daily!) visit Paul Krugman’s blog at The New York Times:
  
  http://krugman.blogs.nytimes.com/
  
  See the 18 links listed in a box on the right-hand side of the page with the beginning words:
  
  Some links to stuff I’ve written bearing on macroeconomic policy. Read all of them, and you’ll have a good sense of where I’m coming from.
  
  But don’t hesitate to read the stream of posts that appear daily along with the comments, some of which are excellent. But beware of the critics, particularly the ad hominem arguers, who you will see through as you get more familiar with their false arguments. You can learn quite a bit from them as you learn how to refute them.
  
  It is interesting to see the arguments between academics as in that world (see Jon Chait in New York magazine) you win the argument based on FACTS not ideological opinion floating free of facts to back it up.
  
  You will also find links to Brad DeLong, Dean Baker and others, as well as publications from respected analysis houses (Economic Policy Institute, etc.) which will help also.
  
  I hope this helps you and all the others who are willing to spend the time and effort to learn; some of the concepts are like accepting quantum theory as real, but believe me, it can all come together and a lot of things will suddenly make sense.
Karen

Put more money in employees’ pockets: How about the government does not take ANY taxes from year-end bonuses distributed to ALL the employees (not just management) based on profits made at the company each year. Imagine all the cash flowing into the economy . . .
- Anonymous
  
  Too much of that “bonus money” goes to people who do NOT spend it on consumer items, but re/invest it in companies creating jobs in the developing world, where the return on that investment is likely to be much better than on an investment in a company doing business here in the U.S.
J Frog

Tim Geithner says the housing bubble was caused by a “long period of very low (interest) rates” and a “terrible erosion of underwriting standards”. Underwriting standards are NOT about there being too much money…it’s about not ENOUGH MONEY to justify the loan. One of the ways people qualify for loans is to SAVE for a down payment. Saving is good.

http://www.youtube.com/watch?v=yqLfwyCTIyc

Also, many market crashes were precipitated with MARGIN investing (i.e. borrowing money from the broker). The 1928 crash was an example of too much MARGIN investing.

Jon Corzine was investing with 40 to 1 leverage (MARGIN).
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We should be SAVING more not less….and we should be managing our debt risk more effectively.
- BHA in Vermont
  
  Erosion of the underwriting standards is related to too much money in the pockets of those looking for somewhere to invest it. Whoo hoo, banks to the rescue, slice and dice bad loans (made with lower underwriting standards and greed) into ‘complex financial instruments’ and sell them to the people yearning to invest, make a bundle for yourself in the process. The banks and mortgage companies didn’t mind making bad loans, they had no risk – they sold off the mortgages to the unwitting investors before the ink was dry. If we had standards that say you MUST have 20% down and MUST prove ability to pay and the originating bank MUST hold 20%, there would be VERY FEW bad loans.
  - J Frog
    
    I couldn’t agree more that the incentives and penalties must be properly constructed.
    - Anonymous
      
      And those incentives and penalties are established through regulations.
      
      But Mr. Livingston was only arguing that Americans did not need to save more than what was required to build up that home down payment, or if they stayed renters, save only to build a nest egg for a comfortable retirement, not to build a fortune to pass on to their children. He didn’t say no one could save, but that, in the aggregate, people do not need to save more than they did before the 1980s when income growth for all but the top 1% slowed to a near stop and people started living on savings, past or future.
      
      And why did income growth decline? Businesses stopped sharing the income growth due to productivity increases with the workers whose efforts were instrumental in that productivity growth.
http://pulse.yahoo.com/_N2V6V557EDHZTMPTTPKSC36DF4 Jim

Thank you Mr. Livingston. Finally some one agrees with me regarding the protestant work ethic. It has always been a lie forced into the ears of Americans. I tell my nieces & nephews to run as fast as they can from any employer who rants about the work ethic. All it means is they will work you as hard as possible for as little pay as possible and fire you when it is their convenience.
- Anonymous
  
  You might want to include this from, no less a person than Ayn Rand:
  
  It only stands to reason that where there’s sacrifice, there’s someone collecting the sacrificial offerings. Where there’s service, there is someone being served. The man who speaks to you of sacrifice is speaking of slaves and masters, and intends to be the master.
Jay Hoekstra

We can “consume” services as well as things. For example perfomance of music or plays, counseling, training in new skills, and so on.
http://fairsharetaxes.org PeteG2

Wow. It’s great to hear a professor that has studied the history reach the same conclusions I have from a different perspective about what’s wrong with the economy.

I’ve been posting this paragraph for a couple of years now (also at my website http://fairsharetaxes.org):

“The favored tax treatment for wealthy investors started by Reagan 30 years ago led to the the share of the nation’s wealth held by the top 1% of households jumping from 22 to 40%. The benefits of the tax cuts on the wealthy were supposed to trickle down. Instead average GDP growth has dropped 25% in the last 30 years compared to the prior 30 years. Why? Wealth concentration and the fact that investments are taxed at rates about one-third of workers’ wages creates a demand for investments that outstrips the supply of worthy investments: Then (under principles you learned in the first week of Econ 101 and in a setting of reduced consumption from the overtaxation of the working poor and vast middle class) … investment bubbles … meltdowns … recession … and all but the wealthiest are at risk of losings their jobs, their homes, and their pensions.”

Any solution to our repeated financial meltdowns, the deficit, and tax reform misses the mark unless it addresses this shameful fact: Billionaire Warren Buffett pays 12% total (federal, state, local, corporate) taxes on $8 billion annual investment gains while a single minimum wage worker pays 37% total taxes on her $14,500 annual salary.

See the numbers and proposed solution at http://fairsharetaxes.org
cmdg

Prof. Livingstone has omitted one thing from his equation:. The current focus among companies on increasing shareholder value drives CEO compensation and other strategies that are not advantageous to the workers. So I hope he can fix that and that someone hears him!
erin

maybe people are choosing to consume less while developing an understanding about the relationship between consumption and environmental destruction. Money is more likely to destroy your soul and the environment.
BHA in Vermont

Can’t agree more with Mr. Livingston other than his comment that the change he suggests is possible in the current political environment. There is no way the Republicans and the rich are going to allow ‘redistribution’. ‘Trickle down’ economics has been a boon to those who gain from the actual, not assumed, result – trickle up. “Tax cuts for all, especially the (bogus name) job creators” will just continue the trickle up until there is no middle class.
Greg Tobler

Socialized investment? We’ve already done that with banking and with the housing industry. We now live amidst the devastating results. Those who decided where the money was to go had no skin in the game—decisions were made by those that had money redistributed to them. The professor will simply redistribute the money to another group, chosen by those who share his absurd ideology. And the results will be just as devastating as the mess we have today. How about letting the consumer keep the money to begin with—and let the good professor spend his own money rather than directing how mine goes.
- Anonymous
  
  What was socialized with the housing boom was the risk of losses when housing prices no longer kept going up. The people who “decided” where the money would go were the big investment banks who thought they could spread the risk of mortgage defaults across multiple “tranches” of groups of mortgages. They were looking for ways to replace the money they used to make buying and selling on the stock exchange before companies like Charles Schwab gave the smaller investor the ability to buy and sell stock, etc., with a small commission rather than the large commissions the banks had charged.
  
  The over-”securitization” of mortgages gave the banks instruments they could sell to the rich, promising big returns and charging big fees because the valuation of the tranches was not transparent, as the difficulty in “unwinding” them in the foreclosure process should make transparent to one and all.
  
  The use of the word “redistribute”to describe the division of the profits of a business between the “owners” and the “employees” is fraught with the danger of its being misused as Greg does in his comment above.
  
  In the period from the end of WWII to about 1980 when the GDP growth was spread over all Americans to the benefit of ALL and was more robust than it has been since. Anyone who claims differently is seeing it only from the benefits to the top 1% or, more likely, top 0.1%.
  
  Professor Livingston is talking about that division being restored, not some “redistribution” of taking homes from the rich and giving them to the poor.
C Konyha Greene

While I tend to agree that the ant’s approach can be overrated, it’s never good for anyone’s soul to spend money you don’t have on stuff you don’t need. So if we want to increase consumer spending, it seems to me like a no-brainer that the consumers need to have more money to spend. Thank you, Mr. Livingston, for pointing out the obvious: if workers aren’t paid enough to live on, there won’t be demand for products, and more people will lose jobs, have no money, not buy stuff… and so on.

The real job creators are the regular folks who look in their wallets and decide whether or not they can afford to buy what other regular folks are selling.
Reality Lit

I’m not sure how using up resources is better for the environment, but consumers are not only the cure for an economy - they are the economy. Nothing would be made if people didn’t first, need it, and/or want it. It is maddening how the idea that the wealthy create jobs, got pulled over everybody’s eyes - compounded even more so by the politicians who are financed by the rich – when it is obviously Labor that creates Wealth.

Also, generally, I don’t think people feel guilty when they are shopping. But they should learn not to spend with abandon, especially if they are buying harmful products from two thousand miles away.
Ingrid

Mr. Livingston comments are refreshing. Consumers fuel the economy. Wages have stagnated or fallen for so long that there isn’t enough spending. Companies refuse to invest if they don’t have confidence in the ability of consumers to buy. Catch-22? Henry Ford was clear. Pay workers enough and we can float the economy. Supply side doesn’t work now, if it ever did. I agree completely that workers productivity should be rewarded. If private employers can’t get it right, government should change the tax code.
MtnPine

I disagree, Mr. Livingston. Americans do NOT save enough money. Our grandparents had it right when they managed to save 20% or more and retired well managed, too. Fortunately, I was raised with this philosophy; therefore, everything is paid off…literally everything.

I grow my vegetables, I have all female chickens who lay eggs that are wonderful and I am off the grid. This has taken about 10 years to complete but is the only way I could envision a safe, peaceful environment that I’ve left in an irrevocable trust for my grandson’s educational fund.

Mr. Livington, I believe the opposite of your position is the better position for our society. Reduce births throughout the world, reduce consumption, reduce, reduce, reduce. We are at least 4 BILLION over populated and, therefore, CLEAN Water and CLEAN air will be what is most important.

SAVE, DON’T SPEND !!!!
- Dave, in Kansas
  
  There’s a difference between micro-economics and macro-economics. The tea-party fury is fueled, in part, by people who think that micro-economic strategies work just as well in a macro-economic venue. E.g. balanced budgets.
  - MtnPine
    
    It’s the choices that we make. I left San Francisco after retiring and moved to the mountains where I had been building over the decades. I exchanged my macro based economy for my current micro based life style. It took decades of planning and building but I am prepared for the future.
    
    We need to make similar decisions for the future of our society.
    - Anonymous
      
      The problem with your thesis is, like Dave said, is that it is something that you as one individual can do. This can be extended to more people but not beyond some small percent, unless there is a MUCH smaller population. If EVERYONE replicated your exemplary approach, with over 330 million, you would have a lot of close neighbors and not the pleasant life you have. And if this had been going on for your whole life, you probably would not have been able to get your current property.
      
      Here is the difference between microeconomics and macroeconomics. Think of the difficulties that would occur if a company had to grow by buying less but selling as much or more, but each division could only buy and sell to another division of the same company. How will each division sell more when the other divisions are buying less? That is nearly the state of the U.S. or the Eurozone today as, for each, imports and exports (trade with entities outside them) are a relatively small part of the economy.
    - Kevin
      
      I’m glad things worked out for you, MtnPine, but your situation is not duplicable for the majority of us. Even the concept of retiring is abstract for most Americans.
      
      There is no possible economic model that could support the cost of everybody moving out to the mountains. The cost of supplying basic human services, infrastructure, education, medical – everything would be astronomical.
http://pulse.yahoo.com/_DPKS3HUGQBPILPIU7IVZSHGXLI Robert_N

Agreed with some of what Livingston says, but for many people thrift isn’t really a choice. People (especially those without group health coverage) are concerned with keeping up with the cost of basics, and being financially secure enough to afford what may well be an expensive future. But along with addressing the reduced spending power of the masses (and not just with cheap, carbon-intensive stuff made overseas), what’s needed is more of a value-oriented economy. More spending that constitutes a real investment in quality of life, and the things that aren’t soon forgotten.
Dave

The real question is: how do we convince the crowd that’s shouting “cut spending / no-new-taxes / smaller government.” They seem immune to history! The CBO chief in 2003 (a Republican!) formally debunked trickle-down theory with a long, comprehensive, well-designed study. Yet right-wingers are still getting themselves elected by parroting 30 year-old trickle-down junk-science. Our electorate is its own worst enemy.
J Frog

I see that Banks lost money during the housing bubble. I don’t see where the rest of corporate America lost any money? Cisco, IBM, Microsoft, Dupont, etc. didn’t invest in real estate or credit default swaps. At least I haven’t read that they did. They didn’t need a bail out. Banks did. This housing bubble was about the Banks, insurance companies like AIG, rating agencies, and real estate owners not recognizing risk effectively. I suppose you could say the construction industry was involved…but the vast majority of Corporate America had nothing to do with the housing bubble that is plaguing us right now.
- Anonymous
  
  And neither did the majority of home owners. But there were enough people who had purchased homes counting on the blandishments or real estate and mortgage agents that the value of their purchased house would continue to go up and they could avoid the balloon payment/jump in interest rate of the mortgage by refinancing. These people now had to spend a much bigger percentage of their wages on mortgage payments so they could not spend on the other things they had been buying. Thus the income of others dropped and they could not spend as much as they had been either.
  
  And when housing prices did not continue to climb, people with good jobs but no growth in wages could not refinance their homes to get the extra money they needed to continue spending as they had been.
  
  These two forces resulted in a huge loss in spending across the whole economy, and those companies that had no direct link with the housing bubble saw their sales dropping and, to maintain their profit level, cut costs, mostly by laying off employees. Now even more people are unemployed, cutting spending and further reducing business income.
  
  But businesses kept profits up by cutting more jobs, thus not contributing to the recovery. Because the return on an investment in an environment with low and/or declining spending is weak or nonexistent, no one wants to make an investment, at least until the machinery used by the company wears out to the point where it needs to be replaced so the company can continue to make its product(s). And that can take years.
  
  So it comes down to the fact that the size of the bubble was determinative: homeowners lost some $13 to $15 trillion in housing value, which was enough to cut enough spending to affect the vast majority of your Corporate America.
  
  Now why couldn’t you go through that analysis yourself? None of the steps are that difficult and build logically on one another. Is it because you wanted a certain result rather than see what measurable facts would lead to?
Brynn Holt

This is a comment concerning the James Livingston story. Here is a solution to bolstering lackluster consumer activity. Raise the global minimum wage to $15.00/hour, adjusted for the relative size of each country’s GDP. Raise all wages proportionally, up to $500,000.00/year, likewise adjusted. Make these raises retroactive ten years, payable immediately. This can be done without raising taxes. This money is considered payable as the commons share of all profits derived from natural resources, and will be payed equally and proportionally from all private accounts over 50 million dollars, and all corporate accounts in excess of 500 million dollars above operating expenses.
Going forward, all profits derived from natural resources will be subject to a cap above which said profits are required to be used in projects directly benefitting the commons. All profits derived from financial instruments and investment will also be subject to a cap and used in a similar manner. This is above and beyond taxes, which can be kept the same, or decreased.
The first commons institution to receive these benefits will be education. We will hire more teachers and provide more facilities and materials for primary and secondary schools. There shall be free higher education for all who desire it, including medical and law school for all who meet academic qualifications.

I love your show. Thank you for your consideration. Sincerely and always,
Brynn Holt
PeterL

Professor Livingston is one of the most incisive and thoughtful thinkers out there. The book is a great read! He defies political labels and gives us radical historicism -read pragmatism – at its best. It is great that NPR added his voice to the public discourse. he’s been making arguments like this for years.
BarbG

Why we buy stuff we’re only really helping out China, since virtually everything is made there. Until the US rebuilds it’s manufacturing base and can provide decent paying jobs, things won’t change significantly. Until then, we’ll continue to be a low wage, service industry based economy.
- Anonymous
  
  Actually, manufacturing is still a big part of GDP, though less than it used to be. The automobile industry used to employ one in seven workers; it is probably less than one in 15 or 20 now, because of automation. But the big loss is because of the rise in the “financial sector,” which previously provided 10 to 12 % of the profits reported but now reports 33% to as much as 40% of all the profit generated in the U.S.
  
  When you consider that the mission of finance is to connect those with “excess” money (savings) with those with opportunities to make or do something that will earn a profit, there is NO WAY that such big a proportion can be justified as benefitting the whole of the country rather than a small segment of it.
  
  That is basically Professor Livingston’s point: the profits from an enterprise should not be siphoned off to the owners/shareholders/debt-holders, but shared more equitably among those who participated in generating them.
  - BarbG
    
    The unfortunate reality is that siphoning will continue and sharing isn’t going to happen. Meanwhile, a growing number of people are trying to survive on minimum wage service industry jobs or no jobs at all. They have neither savings nor excess money.
Anonymous

Sorry to say this, but he is completely wrong. Keynesian ‘Paradox of Thrift’ has been disproved so many times, its astounding people still believe it.
Kevin

There is some logic in this thinking, but overall it is absurd. The critical flaw is the assumption of value in consumer goods. Unfortunately, any time you buy something, a bit of the wealth exchanged ends up in the coffers of the financiers, further exacerbating the wealth disparity that is at the root of our problems. A better solution is to trend to local trading and local economies, with less value being distilled off by outside interests and more value being retained inside the community. The more we can shift the profits of our labor to our local communities, and ultimately to the producers themselves, the less opportunity capitalist entities will have to siphon it away.
Heaviest Cat

so will Her and Now see fit, as a “public” radio program see fit to offer a counterpoint to this call for mindless mass consumtion?
farhorizons

Incredible. And this guy calls himself an economist? Mr. Livingston, have you never heard of global warming and the trashing of the planet? The last thing we need is more consumption to beget more production to beget more trash to beget more…you get the point? We need a way of prosperity that doesn’t involve growth of production and consumption. And economists like you aren’t yet able to come up with new models, unfortunately. You’ve probably never seen the brilliant animation The Story of Stuff. I suggest you check it out.