Status Anxiety

"Were an alien to pick up our news channels, it would conclude that human civilisation depended on the production of cheap plastic tat." This would be the outsiders view of our existence according to Tim Harford, in his book "The Logic of Life". For my money, he probably goes a bit far in discrediting our ability to produce useful things, but the importance of the consumer to economic growth during the last 25 years, particularly in the UK and the US, has been very clear.

In a simplified story-line, China has been the global producer of last resort, and the US has been the consumer of last resort. This plentiful arrangement had worked quite nicely for both parties up until recently. China funded a decent chunk of the credit that US consumers fed-on, and in return the US purchased the "tat" and not-so-tat stuff that was made in China, creating jobs, prosperity and a very large current account surplus in China. This surplus was then recycled into more US government and consumer debt, and more "tat" was bought to fill the houses that were rising in value so nicely in places like California and Florida. Then a wheel fell off the wagon.

Now, attempts to fix the broken wagon have almost been fully exhausted; the Federal Reserve has reduced interest rates to 0% and we have been through a variety of various asset purchase plans and bail-out plans. The only remaining tool left in the bag is to start printing money - which didn't work quite so well for the Weimar Republic in Germany in the early 1930s. Hyperinflation, and the Nazi party followed in short order.

Within the US and the UK, the solutions being proposed to "get things back on track" seem to be aimed at recreating a more sustainable version of the spend, borrow, work philosophy that successfully drove up economic growth over the past quarter of a century, and that also led to the current implosion. After the initial stage of the overall crisis, which started as a banking crisis, we have gone through several stages of thinking within what is termed the "real economy", that have led us in a downward spiral:

1) Pessimism. Fueled by news commentary on the plight of the financial system, which led to:
2) Lower planned spending;
3) More pessimism from banks, because of this lower planned spending. As a consequence, banks started to lend less;
4) Lower spending because of less consumer credit;
5) Lower earnings for companies because we are buying less of their stuff;
6) Less credit available to companies because their earnings are falling;
7) Companies can't get credit, so lower inventories/ stock or companies can't refinance debts so they either sell assets or default;
8) Banks need to lend less because the are taking writedowns against past loans to these failing companies;
9) Layoffs/ recession etc. etc.

It looks like in the short-run, there is a serious dependence on consumption to keep this legal "Madoff" scheme going ("Ponzi" is so last year). In the run up to Christmas, which the British theologian Don Cupitt referred to as "the Disneyfication of Christianity", we are reminded on news channels of how absolutely critical it is for our shopkeepers lives that we get out and spend this year.

In the longer term, perhaps there are more choices, and we could go about things in a different way. A completely counterintuitive approach might be that we collectively accept a lower average income and take more leisure time, doing things that don't involve consumer spending. It's interesting to note that the typical British man earns roughly twice what his father did at the same age, on an inflation adjusted basis. When today's children are in their forties and fifties, perhaps they will opt to use their increased prosperity to work less and take more leisure time. Instead of being twice as rich as their parents, they may opt to start their weekend on Wednesday afternoon. In theory this would be possible, as we are rich enough already. A survey done 10 years ago by a couple of US economists (Solnick and Hemenway) found that many Harvard students would rather have an income of $50,000 in a world where most people were poorer than an income of $100,000 in a world where most people were richer. Perhaps that survey says something about those Harvard graduates, but the point is played out across society. There is no rational economic logic to this behaviour.

To continue the theme of Harford's "The Logic of Life", he identifies this sort of behaviour with what he calls "status anxiety". The desire that "status anxiety" produces is almost insatiable because it is largely relative - the better someone else is doing, then the better you need to be doing. Perhaps in China, the opposite happens to what happens in the US; status comes not from having a yacht, but from having produced the most stuff and having saved the most. It is what George Soros would call a reflexive process; i.e. it is a self-reinforcing process, and becomes the bias of a society or culture. Neither route is necessarily right.

On a personal level, I would like to retain the choice to work longer, for more ability to consume or to work less for more free time, and to take the trade off decision at a personal level.

One worry is that the current response to the excesses of past consumerism, might make this trade off more difficult for us all. Current government bail-outs that are aimed at reinvigorating our consumer orientated economies will in effect be placing the motherload of a credit card bill onto future generations, which may limit those choices. Taxes will need to go up at some point in the future.

The erosion of tax revenues will only be made up by longer working lives, or more successful, innovative companies. If there is a collective move away from 'consumerism', towards working less and taking more leisure time we will see plenty of defaulting governments in 15-20 years time as the burden of today's debts are unmet by the desire of the next generation to sustain the approach our generation so eagerly lapped up.

As many people around the world are facing up to their relatively tough economic situations, there is evidence that a significant number are looking to reconsider their work/life balance - either through their own choosing, or through an enforced situation...i.e. they have been laid off. For many in this camp, the lucky ones who were closely involved in the gold-rush of the last 25 years, or those who've worked long enough to have achieved the standard of living their parents had at a considerably earlier age, there are real choices.

The flexibility to opt for a simpler more frugal existence is there for the taking, albeit that many people would say this is too difficult a change to contemplate; private school fees, 2 cars, golf club membership can't be given up. The alternatives are substantial; perhaps working in the 'day job' from monday to wednesday afternoon (by which time you will be at your parents income level) and then spending thursday and friday working on charity projects, sporting endeavours, or whatever else flicks our collective switches.

The burden of financial responsibility for the problems that the work, spend, borrow philosophy advocated over the past 25 years, is being shifted onto the next generation, who will not have been the beneficiaries of the 'good times', but will be picking up the tab. Is it fair, given that they may want to move down the route towards a more holistic lifestyle, that they should be burdened with an even greater responsibility for tax revenue generation than ever before?

It's a difficult time to be making policy decisions, but the law of unintended consequences may mean that widespread economic bailouts just reinforce the behaviour patterns that got us into this mess. As difficult as it is to swallow for many people and many businesses, it is important that sufficient pain is felt by the system in the short-to-medium term so that we are really forced to consider what approach we choose to collectively take for the long term.