Wednesday, April 8, 2009
Is the American Consumer Becoming More Prudent?
Consumer credit fell in February, as reported in an article here. Accompanying the article is a graph showing consumer credit for almost 20 years. While reduced borrowing may be linked to reduced spending, and the government would like to see spending increase to help the economy pull out of recession, I think consumer credit needs to fall further. Households need saving to help during unexpected events such as serious car trouble, furnace going out, illness, layoff, and numerous other possible events. Further, longer-term saving for anticipated events such as buying a house, college education, and retirement is prudent. In fact, prudence needs to be emphasized in our economic life. Prudence is a term with a long history in economics. Adam Smith wrote of the virtue of prudence, and, more recently, Deirdre McCloskey describes prudence as, "...first in political and economic and bourgeois value." (Deirdre N. McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce. (Chicago: The University of Chicago Press, 2006), p. 253.) Perhaps the American consumer is becoming more prudent. Then again, it could be a short-term effect due to declining wealth and increased job losses.