I’m going to just go ahead and say up front that I’m expecting three types of reactions to this post:  agreement, head shaking, or the finger.  I’m looking forward to seeing how these shake out, so don’t disappoint me.  Post a comment below and let me know how you feel.

“You cannot bring about prosperity by discouraging thrift.”  -  Abraham Lincoln

For quite a while, I believe that our government has had an active policy of encouraging short-term consumption at the expense of long-term savings.   At each sign of economic weakness since the mid-80s, the government response has been to psuh down interest rates to encourage borrowing and consumption.  Not surprisingly, this has correlated to a decrease in saving (from 8-9% in the 1980s to .5% until recently) and also an increase in debt-to-income:

Simply put, we saved less and we spent more.  The effect of this was to keep our economy moving, albeit at an artificial rate.  In a recent article on the impact of increased debt on economic growth, Business Week lays out how increased debt masked fundamental weakness in our economy:

The bursting of the credit bubble suggests that the U.S. and global economies have a growth problem as well as a debt problem. According to the official numbers, economic growth in the U.S. has averaged 2.7% over the past 10 years. But by BusinessWeek’s calculation, U.S. consumers have run up about $3 trillion in excess borrowing and spending over the same period-consumption that was not justified by income growth. Without that boost, which translated into new homes, cars, furniture, clothing, and the like, U.S. economic growth would have come in considerably lower. The global boom, too, was artificially fueled by out-of-control borrowing by consumers and businesses. “There was a sense of a bubble not just in real estate, but in that the underlying fundamentals were not supporting the market,” says Michael Frantz, a Seattle-based managing director at project-management firm Point B, based on his conversations with clients.

Looking back, it has become clear that rampant borrowing and spending by U.S. households concealed fundamental weaknesses in the rest of the domestic economy. U.S. economic growth, outside of personal consumption, averaged only 1.3% per year in the 10 years ending in 2007, the slowest rate since the 1950s. In other words, if consumption had not been pumped up by excess borrowing, the economy would have looked a lot weaker. From this perspective, the debt, like a fever, was a symptom of a deeper problem.

The bottom line is that I think that the government knew what was happening, but simply chose to let us continue to party like it was 1999.  In a December article, the New York Times outlined how George Bush had been advised that housing prices were overvalued based on the price acceleration relative to wages and when compared to comparable rents.  They chose to do nothing. Don’t break up the party–just feed us more drugs and pray that it could keep going.  (Republicans, I can feel you rolling your eyes).

I know it’s popular to blame Bush for everything, so I won’t.  I think it was everyone in the government.  Not in an explicit conspiracy sort of way, but just an implicit “why break up the party” sort of way.

Which leads me to my man-crush on Alan Greenspan.

I’m an amateur economist and have always had AG on my “Top 5 People to Have Dinner With” list.  I met AG at a conference in 2007 and asked him what would happen to our economy if consumers retrenched on savings and housing prices decelerated.  He had been speaking about globalization and how competition provided a limitless platform for growth (yada, yada, yada) so this question came out of the blue.  “That”, he said sagely, “is the $64,000 question.”

Right then I knew we were screwed and my man-crush evaporated in that instant.  We were in trouble and AG knew it but had kept it a secret.  Greenspan had pushed interest rates so low that they had completely distorted all economic perspective and we spent like we shouldn’t have, bought homes that we shouldn’t have, and convinced ourselves that it was normal.  More drugs with the hope for and endless party and a prayer that the hangover would never come.

We met the initial slowdown bravely as all brave countries led by brave officials might:  with a stimulus plan.  No longer content to let us dig our own holes via the miracles of uber low financing, our government hoped that we would remain as dim as historical evidence suggested we might and convinced us to borrow $350B from ourselves and then send it to ourselves in the mail in the form of a “stimulus check.”  Not great branding, but good enough.  Most of us missed the slight of hand that pulled money from our pocket and put it in our hand and we felt richer.  And we spent, although some of us disappointingly put this toward savings or debt reduction.

Now we’re headed into an even braver world: that of the new, new stimulus.  The $350B was not enough (although it was about $3,000 per household), so we’re doubling down with a $1T stimulus package, nearly $8,900 per household.  Now I would honestly like to believe that this money will be a good investment, but I doubt it and I think I’m the only one in America.  My doubt is based on the gifting principle which simply says that if you’re going to spend $100 on me for a gift, you’re probably not going to optimize your purchase by matching it to my preferences as well as I would have since I know my preferences much better than you do.  And moreover, if something is worth $100 to me now, I’ve already bought it.  So the best thing you can do is to simply hand me $100 and smile. Now the gifting principle says that the government is not likely to spend my $8,900 optimally.  But somewhere, someone is pushing and hoping that I’ll take the drugs and party a few more years.

There are other ideas out there that also give me pause, namely the thought that we’ll come up with some way to artificially lower interest rates even further for people with mortgage trouble to keep them from defaulting.  Unfortunately, this will have the unintended consequence of keeping prices higher than they would otherwise be, discriminating against those who don’t qualify for subsidized rates and postponing the ultimately adjustment to housing prices.

I think about this in the context of media commentary and government policy and I shake my head.  But against all this, consumers are trying to do the right thing.  We’re retrenching, spending less and saving more.  and yet the media, rather than celebrating the increase in thrift as a good thing, laments the lack of consumer spending as a negative.  Here is a quote from USA Today’s lead story: “…a deteriorating economy forced consumers to cut back on spending…”

Yes, the economy is forcing our hand.  But in response to the economy, we’re doing what we should have been doing all along.  If the government will only let us.

“You cannot bring about prosperity by discouraging thrift.”  -  Abraham Lincoln

What do you think?

Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.