President Bush was ridiculed for telling the American people to go shopping in the wake of the Sept. 11 terrorist attacks to ensure that the country’s economy didn’t slide too far downward. His prescription for economic stimulus, it turns out, was right on the money.
In a country where consumer spending accounts for nearly three-quarters of the gross domestic product, shopping is critical to economic vitality. Consumer spending as a percentage of GDP held steady at about 63 percent until 1980, when it began to grow. Last year, it was about 70 percent, dwarfing business investments and government spending.
The Commerce Department reported last Friday that retail sales dropped by 1.8 percent in November, the fifth-straight monthly drop. Economists expect the drop to continue into the first quarter of 2009, making for the longest period of consumer spending decline since 1942.
This lack of spending perpetuates a downward cycle, says University of Maine economics professor Jim McConnon. With fewer items, big and small, being bought, companies look for ways to cut costs. This often leads to a reduction in jobs, since labor is usually a company’s largest expense. People who fear losing their jobs spend less, perpetuating the cycle.
“The average person is terrified,” says John Mahon, dean of the University of Maine School of Business. People need some good news, he adds. Lower fuel prices are good news. Falling home prices are good for buyers, but not for those seeking to sell a house.
To break the cycle, Dean Mahon suggests shutting down the stock market for two weeks. With Christmas next week, trading volume will be low anyway through the end of the year. Without daily, and often hourly, reports about the market (especially its precipitous drops) consumers and investors can get a break from the disconcerting news. This would also give the market time to readjust without the minute-by-minute shifts in confidence based on the news from Washington, Detroit, New York and the rest of the world.
Dean Mahon would also have the administration send out economic emissaries to talk with pension funds and other large investors to encourage them to stop selling. This would help the market rebound and improve the psychology around the market, which relies on predictability.
If there is any good news about the financial bailout, the White House should be trumpeting that as well.
The bottom line, however, is that people who can, need to spend more money. Only six more shopping days until Christmas.