Spend? Save? What Is the Right Course Now for Everyday Americans?

For those hoping for economic recovery, one of the most important questions that has come up is the role everyday Americans will play in bringing about a global and domestic turnaround.  In hearing discussions of the stimulus today, particularly in defense of the tax cuts, you hear about the need to put money in people's pocket so they will go out and spend, accelerating economic activity, helping bring about an end to the recession.  

But is this really the best course for American families now? If the story of everyday people this decade has been flat wages, declining incomes, easy credit, debt financed spending, overleverage - shouldn't there be a conversation taking place about encouraging Americans to get their own family balance sheets in order before they go out and spend some more?  After 9/11, Bush argued that it was important for Americans to go out and shop.  But is that the case now?  In this new age of responsibility, should we be talking about getting everyone on stable 30-year mortgages, paying off high-interest credit card debt, tackling home equity loans whose equity has vanished, saving more for retirement to make up for the stock market decline of recent years?  I understand that talking about saving more, paying down debt, cutting back on spending after the recent binge leads to slower economic activity in the short run - and a longer and deeper global recession - but isn't this the best course for American families? 

In the Times today there is an interesting piece on all this which concludes: 

"Consumers are rational," said Joshua Shapiro, chief United States economist at MFR. "They respond to incentives and conditions, and right now the conditions and incentives are: spend as little as you can, and pay down as much as you can. You hunker down. That's what the consumer's doing." 

But what will it mean for the American and global economies if American consumers waking up to the recession, their loss of 30-50 percent of their assets, uncomfortable and expensive levels of debt, decide to let all their stuff age for 3-5 years - no new cars, additions on the house, washing machines, tvs, clothes?  Make do with what they have. Pull back, hunker down, get the family balance sheet back in order, save for an uncertain future, adopt a new culture of thrift. 

Not sure this very real possibility is being given adequate consideration right now in our planning.

10pm Update - The auto companies are reporting that their January sales dropped 50% percent from a year ago.  50 percent in just 12 months. I don't think we are seeing a normal downturn, a normal business cycle.