Why Shopping Isn't the Answer to America's Economic Woes

Why Shopping Isn't the Answer to America's Economic Woes

Given the state of the economy, many of us aren't exactly flush with cash.

But for some reason, we often hear that consumers like us should spend in order to help stimulate the economy.

And it's not just retailers saying this. (Although, they're probably not upset that we spent a record-breaking $52 billion in Black Friday sales this year.)

In fact, the push to spend comes from a group that has no way of making a quick buck from us: economists.

They urge us to spend even though unemployment is still high (8.6%), more than 14 million U.S. consumers are still paying off credit card debt from last year’s holidays, and only 13% of Americans say that U.S. businesses are in good shape.

With all of this weighing on our shoulders, why should we be expected to stimulate the economy with our own hard-earned cash?

The answer is simple: We shouldn’t be.

Why We’re Encouraged to Spend

Consumer spending makes up roughly 70% of our country’s economic activity. So it stands to reason that more spending will help to stimulate our economy: Demand will increase, businesses will thrive and grow, and jobs will be created as a result of that growth.

In the United States, we are so convinced of the economic importance of spending that it’s almost impossible to believe that there could be economies that function without this constant influx of dollars.

But these economies do exist—and they’re thriving.

Countries That Save vs. Countries That Spend

Western and Northern European countries are known for their supersaver citizens. For example, in both Germany and Sweden, saving, not spending, is seen as a civic duty. In the past 30 years, Germany has maintained household savings rates between 10% and 13%, and Sweden's current household savings rate is 13%. In contrast, the U.S.’s household savings rate dropped to nearly zero in 2005; it’s currently less than 4%.

A Closer Look at Germany

Rather than encouraging consumers to shop ‘til they drop, Germany pushes its citizens to save. Consumer spending makes up only 57% of the country's economic activity, compared to the U.S.'s 70%. Sparkassen, or savings banks, are found throughout German cities; they feature no-fee accounts for the young and are charged with promoting financial education and literacy throughout German schools. Additionally, there are very few home equity loans in Germany, and credit cards that allow unpaid balances are rare.

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Saving in Sweden

Saving, rather than overspending, is the rule of the day for both individuals in Sweden and the country itself. Compared to the United States, where credit card use rose in the first three quarters of 2011, household borrowing in Sweden slowed down each month in the last year. What’s more, the U.S. government currently holds more than $14 trillion of debt, while Sweden’s government will actually see a budget surplus this year.

To sum it up, Germany (the E.U.’s largest and most stable economy) and Sweden continue to prosper, while encouraging saving instead of spending. Why do economists here recommend the opposite tack?

In the U.S., Spending Equals Borrowing

On Black Friday this year, Americans charged 27% of their spending to credit cards, and 43% of shoppers admitted they spent more than they had planned. Considering that more than 14 million consumers are still paying off their 2010 holiday debt, these added bills will put people deeper in the red.

So, consumers are spending money that they don’t have, borrowed from banks which, as we know from the bank bailouts after the 2008 financial crisis, are none too cautious themselves when it comes to, well, having money in the bank. In short, an increase in consumer spending—when the spending is fueled by credit, rather than by cash—only serves to dig our economy further into a hole, even though it might improve certain manufacturers' bottom lines.

We Don’t Have Enough in Savings

64% of Americans don’t have enough money in cash to cover an unexpected $1,000 emergency expense and would need to charge it. And that’s a one-time expense: When faced with sudden unemployment, or a struggling business in a down economy, most Americans find themselves totally unprepared. That’s why we recommend saving at least 10% of your budget each month (like the Germans and Swedes do). By saving this much every month, you'll be prepared to handle a rainy day and weather a bad global economy.

So, How Do Their Economies Grow?

Yes, spending is necessary to stimulate an economy. But if it’s spending fueled only by credit, it's good only in the short term and very bad in the long term, ultimately undermining economic stability.

Notably, both Sweden and Germany have prospered due to the success of their exports. Our country is four times as large as Germany's, but Germany exports more manufactured goods than we do, making up more than one-third of the country's economic activity. In Sweden, exports in the third quarter of this year have grown 8.2%, leading to GDP growth of 4.6% and contributing greatly to Sweden’s economic success.

Our takeaway? When U.S. companies encourage spending, they should not send that message to debt-burdened American consumers but to consumers and businesses in other countries. And by that, we mean that our country should, like Sweden and Germany, capitalize on its export strength—namely, the fact that we are the world's largest exporter of services, generating a $130 billion surplus. By furthering exports of services and manufactured goods, both American businesses and our economy will grow—without encouraging Americans to dig themselves deeper and deeper into debt.

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