Stimulating consumerism, encouraging debt

By Michael J.W. Stickings

I realize that part of what the economy needs is more consumer spending on big-ticket items, and so I understand why Republicans pushed successfully for a $15,000 tax credit for homebuyers to go along with a tax incentive for carbuyers, both now part of the Senate's stimulus package, but is encouraging more spending at a time when jobs are being lost and the credit market has dried up really such a great idea? I mean, you can give people any sort of incentive you want, but what if they still can't afford to buy those big-ticket items? Ten percent of a new house, up to $15,000, is nice and all, but there's still the other 90 percent to consider.

And so while the tax credit might help shore up the housing market by keeping prices up -- and perhaps even reduce foreclosures by allowing people to take out smaller mortgages -- it's not clear to me how this helps fix what truly ails the U.S. economy and the financial sector, namely, too much risky lending and borrowing, and spending, at a time of global economic restructuring. Indeed, it seems to me that encouraging people to make such big-ticket purchases could actually make the situation worse than it is already by putting more and more people into more and more debt from which they'll have more and more difficulty getting out, leading to more and more foreclosures, more and more repossessions, and more and more bankruptcies.

Take the example of buying a new flat-screen, high-def TV. If you go to your local Best Buy, or a similar store, you might find a TV you want for, say, $2,000. But maybe that's beyond your budget. Or maybe you just don't need a new TV when you're already having trouble paying the bills, and maybe you're worried that you'll shortly be losing your job. Maybe you should put some money away or spend it on your kids. But what if some sort of credit were being dangled in front of you? What if, say, that TV would only cost you $1,800? Ah, now it's more reasonable. And maybe you think, what a great deal. Ten percent off. I'd better take the offer before it's off the table. Who doesn't want a high-def TV? But then, once you buy it, you still have to find the $1,800, and, given your current financial situation, you'll probably have to put it on credit. But you're already maxed out, or close to it. And what if the incentive encourages you to buy and even more expensive TV? What if that $2,500 one is the one you really want, and, well, if you can get it for $2,250, that's a pretty good deal. So why not? It's all going on credit, after all, and what's a few hundred more dollars?

I realize it's not a perfect analogy -- a TV isn't a house or a car, and you don't need to access as much credit to buy one (unless it's some super-expensive one), credit that has dried up -- but yet get the point, I'm sure. While quick-fixes to stimulate the economy are appealing, and certainly so to politicians, who must ultimately answer to constituents, encouraging Americans to buy more, and to go deeper into debt, is reckless and irresponsible, and certainly not the answer to the economy's woes.