Have you been getting fewer noisome credit card offers lately? If so, you’re not alone. Revolving credit is contracting. Meredith Whitney, CEO of her own stock analysis organization, says that about half of the “roughly $5 trillion in credit-card lines outstanding in the U.S.” will “be expunged from the system by the end of 2010.”
My first thought upon reading this was that $5 trillion in available credit card debt amounts to nearly $17,000 for each living person in the nation and nearly $50,000 for each U.S. household. That’s a lot of available unsecured debt. Whitney notes that Americans generally only borrow 17% of this accessible amount. Still, that amounts to $850 billion in outstanding credit card debt, or about $7,500 per household.
We’re swimming in credit card debt. Americans have been buying on credit like crazy for the past few years. Wouldn’t reducing available credit card debt by half be a good thing? Wouldn’t that be the prudent way to go?
Hold on there, says Ms. Whitney. Let’s consider the ramifications of “this swift contraction in credit well beyond the scope of the current credit market disruption.”
Whitney writes, “Without doubt, credit was extended too freely over the past 15 years, and a rationalization of lending is unavoidable. What is avoidable, however, is taking credit away from people who have the ability to pay their bills.” This would have an unnecessarily harsh impact on the economy.
While everything that Whitney says is accurate; she seems to look at our economic problems primarily as a lack of adequate consumption. In fairness, this may be because she is treating only a specific segment that happens to be consumer centric. But there are plenty of journalists, government officials, and highly educated economists that take the same view.
While “two-thirds of the U.S. economy [is] dependent upon consumer spending,” as Whitney notes, putting the key focus on consumerism provides a skewed view and leads to doing the wrong kinds of things. The emphasis must not be on promoting consumer spending, but on supporting and encouraging the effective development and marketing of goods and services that consumers want at prices they are willing to pay.
You may argue that these are just two ways of stating the same thing, but they are not. One is like trying to grow a tree in your yard by looking mainly at leaf production. The other is like trying to grow a healthy tree by properly preparing the soil and carefully tending the whole tree from the roots on up. This approach takes longer, but it will achieve the desired results more readily than the other method.
Today, it seems that most of our public policies aimed at helping the economy are ‘leaf’ oriented rather than ‘root’ oriented. We have the wrong focus, so we’re doing the wrong things, even to the point of harming the roots that are essential to the vigor of the whole tree. If we get the proper focus, we’ll be more likely to do the right things.
Our economy is not primarily based in consumer spending. It is based in freedom that results in the kind of productivity that not only provides people resources to spend, but gives them goods and services upon which they want to spend those resources. Until we get this right, we’ll continue to do the wrong things.