Tuesday, December 30, 2008

Deleveraging, retail style 

Glenn Reynolds links a short post by Megan McArdle on the precipitous decline in retails sales during November and December. Megan does not think it is all bad:

But it seems to me that this is actually good news for consumers and, in the long run, the economy. Americans are massively over their heads in debt, and have been consuming beyond their means for a long time. The data shows them cutting back their spending to more reasonable levels, and cutting back the most in the most discretionary categories. I feel bad for Hermes and all, but we couldn't keep propping them up forever.

This is all, obviously, just another example of the deleveraging that is going on throughout the economy. It is not just shoppers who are spending less -- which means they are saving more, at least for the time being -- but people in all their capacities, as homeowners, investors, small businesses, and corporations. As Megan says, Americans need to get their heads above the debt. It would have been better if they had come to this conclusion gradually over the last 20 years instead of all of a sudden over Labor Day weekend, but there you have it.

The little dig at Hermes conceals another point, I think. I am not economist enough to prove it, but I suspect that in the current climate most retail sales do not multiply through the economy as quickly as other expenditures, such as for personal services or construction. A huge percentage of our consumer products are imported, so a good part of the money spent on a television at Best Buy has to make a long journey before it will turn over again in the American economy (not exactly, because Best Buy bought the inventory before it sold it, but the point holds because Best Buy has to replace that TV with another one). If, however, I treat myself to a massage, or buy a dinner at Applebee's, or even hire a guy to put an addition on my house, that money, sometimes virtually all of it, will turn into spendable coin in days, hours, or immediately. Point is, I believe -- could some economist out there comment? -- that sales of imported products slow down the velocity of money relative to the average, and that sales of personal services increase it.


By Blogger Diane Wilson, at Tue Dec 30, 09:24:00 AM:

A couple of quick thoughts. One, if Best Buy sells a TV, part of that money goes to salaries, utilities, and other expenses that keep a portion of the money right here in the US.

Second, "buy American" is pretty tough to do these days, and the old ad song "Look For the Union Label" isn't going to win many friends, either. But there are still some industries that are pretty much American, and they do deserve our support. Software. Books. Event the transplant car companies. "Buy American" need not be limited to services; we do still make some things here, and make them well.  

By Blogger TigerHawk, at Tue Dec 30, 10:02:00 AM:

I'm not so keen on buying American per se. I like a lot of foreign stuff, like Guinness, French cheese, and German automobiles. My point was only that a decline in retail sales, especially of consumer goods, probably does not hurt the velocity of money (a key to eocnomic growth, if you are a monetarist) as much as declines in personal services. I suspect that a lot of the concern with retails sales is a function of its visibility -- you can see people shopping, and you can see the shuttered store when it fails.  

By Blogger Shawn Levasseur, at Tue Dec 30, 01:39:00 PM:

So spending on services locally is a better benefit to an economy than goods that aren't...

So hiring a hooker would be considered doing one's part to help out the local economy?  

By Blogger TigerHawk, at Tue Dec 30, 02:31:00 PM:

Yes. If I'm right, money spent on hookers would multiply through the economy faster than money spent on cocaine, or Guinness.  

By Anonymous Anonymous, at Tue Dec 30, 04:31:00 PM:

Yes. If I'm right, money spent on hookers would multiply through the economy faster than money spent on cocaine, or Guiness.

So hookers are okay. What about blackjack?  

By Blogger Joe Katzman, at Tue Jan 06, 11:32:00 PM:

Anonymous: Only if it comes with a hooker.


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