PayGo: Democrats vs. Republicans vs. consumers

PayGo is the principle holding up correction of the Alternative Minimum Tax. Kind of. The Democrats won’t remove the AMT without replacing the lost revenue (we call this fiscal conservatism, or responsibility). The Republicans, on the other hand, don’t.

I’ve mentioned this disparity previously: humorously here, but seriously here. Fixing the tax clearly benefits Democratic districts; it’s good to see them holding to their principles (and I’ll be amazed if they continue to do so).

How does this relate to consumers? Consumers don’t go in for this “PayGo” mumbo-jumbo, so much. Also mentioned previously:

In the dot-com bust of 2001, for example, tech companies and stocks took it on the chin, while consumer spending and borrowing sailed through without a pause. This time the positions will be reversed, as consumers tank while much of the corporate sector stays on track.

It’s been a glorious run for the consumer. In the past 25 years, Americans have kept shopping through good times and bad. In every quarter except one since 1981, consumer spending rose over the previous year, adjusted for inflation. The exception was the first quarter of 1991, and even then the decrease was a mild 0.4% dip.

The main fuel for the spending was easy access to credit. Banks and other financial institutions were willing to lend households ever increasing amounts of money. Any particular individual might default, but in the aggregate, loans to consumers were viewed as low-risk and profitable.

Corporate sector staying on track? Probably not so much:

According to John Graham, director of the survey and a finance professor at Duke’s Fuqua School of Business, CFO optimism is dramatically spiraling downward.

This is particularly worrisome, because CFOs — unlike the more naturally optimistic CEOs — have a track record of accurately predicting future economic activity, often several months ahead of traditional indicators.

Enough pessimistic digression! Back to consumers:

U.S. consumer borrowing accelerated in October as buyers turned to credit cards and non-mortgage loans to maintain their spending, Federal Reserve statistics showed.

Consumer credit increased $4.7 billion for the month to $2.49 trillion, the Fed said today in Washington. In September, credit rose $3.2 billion, less than previously reported. The Fed’s report doesn’t cover borrowing secured by real estate, such as home equity loans.

The economy may stall in the final three months of the year, after growing at the fastest pace in four years in the third quarter, as consumers grapple with credit restrictions, the housing recession and surging petroleum costs, according to economists’ forecasts.

“The consumer has not put the brakes on hard yet and their spending should be moderate during the holiday season,” said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “But declining home prices are a worry and this housing market will not show much improvement in 2008.”

Theory! If we just, say, called Christmas Christmas, and stopped trying not to offend people already living within our Judeo-Christian Roman freaking calendar, would this problem not be so bad? I don’t know. I like the theory, though.

The BusinessWeek article did mention some USD4tr of untapped credit card capacity. I mentioned the disaster that would befall us if we used it (I’m not using mine, and my wife isn’t using hers – certainly not for asinine things like new Christmas lights).

House prices have driven wealth for the last decade or more. Much earlier in semester, though, I was showing my students how housing inventory has been the booming statistic, through 2007 (thanks to the Census Bureau’s Housing Vacancies and Home-Ownership numbers; click on the images for larger versions):

census for sale

(and check out those Held Off Market numbers)

held off market

Increase the supply of houses, and you lower the price. Lower the price, and you lower wealth. You have less asset to back those debts. For consumers, this means that you need to cut back even more, further lowering consumption spending (maybe – they haven’t yet). Assuming, of course, the principle was held by households.

Who knows, in the big Macroeconomic equation, maybe Consumption:

Hubbard O’Brien Consumption chart

will end up looking appropriately bumpy, like Investment.

Hubbard O’Brien Investment chart

Stranger things have happened. As the “Consumer Crunch” article detailed, though, people have been predicting such an end for 2 decades or more, now. So shall we all not hold our breath?

Personally, though, I think such a correction is more likely now that at any other time. Although corporate profits are healthy, CFO outlook is grim, and an expanding middle of American households are losing real purchasing power on their incomes, even as decreasing household equity lowers their wealth and the jobs to which we like to refer aren’t as good as the jobs being lost.

Eventually, we’re going to obtain every single contributor to declining consumption spending possible – already we aren’t far off. Of course (Eco 1 students!), we could be about to find two more generations of the same behaviour underneath the thawing Artic Circle. You never know your luck…


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