Eat Your Leftovers

I had occasion to have lunch yesterday with the owner/operator of a chain of grocery stores, one well-known in the Southeast U.S.  He told me that business was down, and down considerably in the last couple of months. I expressed surprise at this remark, indicating that I thought an economic downturn might be good for grocery stores as fewer people would eat out and more would cook at home — helping the grocery business.

“No,” this 60+ year veteran of the grocery industry said, “when people get scared they eat out of Tupperware.”  He went on to explain that he thought it was just a natural reaction that people hoard and save food during fearful times. During normal times, they throw that last bit of macaroni and cheese away. But, when they sense even the slightest possibility that food might be a more difficult for them to get in the future they put that small portion of mac and cheese in the refrigerator for tomorrow’s lunch.  This grocery executive did not couch his explanation in the language of evolutionary psychology, but that was the thrust of its content — a long-established natural reaction to save food for survival.  His terabytes of scanner data were telling an ancient story, of a very human reaction to this economic mess.

The Open Wounds of Class Warfare

The checkout line at the grocery store is generally an uneventful place. I’m usually moving as quickly as I can to get home and rarely hold conversations with anyone. My thoughts are focused squarely on domestic issues at that point, my work concerns have largely vanished. This Thursday was different. The person bagging the groceries in my line, perhaps to the chagrin of the store manager, was speaking in loud tones to anyone willing to listen. His voice could be heard not only in the line I was in but at least three lines in either direction. He was mad, and I mean mad in a way that kind of freaks you out if you are standing in the line in which he is working. He was mad because he had lost a substantial amount of his retirement money in the market free fall, and he was letting anyone within earshot know that he believed the criminals responsible for this loss should face the long arm of the law.

This feeling was echoed in several blog comments I received based on my “Bailout Envy” post and blog reference in an article that ran a few days ago on Yahoo! Finance . For the first time since I started this blog, I decided to reject some comments — their language unfit to print. A reasonable characterization of their position is that I should be ashamed of myself for coming to the defense of Wall Street executives and that the U.S. prison system should be enlarged to handle the inflow of financial services employees who should soon be residing there.

In both the case of the grocery store employee, and the comments (some posted others not) to my blog, the open wounds of class warfare are evident. The anger is palpable. 

Some banking executives deserve to go to jail. I have little doubt that this will occur. At the same time it is so incredibly convenient, so grossly unfair, to blame the entirety of what has happened on banking executives and mortgage brokers. Many of these people, just like you and I, saw and understood what was happening in only a very partial way at best. Perhaps they should have understood, but that is a tall order in such a complicated market. Let the first person who has never failed to mention a defect in the used car they were selling cast the first stone.  

The cold, tough reality here is that these banks would have never been able to profit from these loans if Americans had not, en mass, made a headlong rush into purchases they could not afford, debt they could not handle. It is easy to blame bank executives. It is somewhat harder to blame the people we know in our lives who took out mortgages based on highly speculative bets on home price appreciation, to blame those who used their houses as piggy banks — taking out home equity loans to finance their current consumption. And it is the most difficult of all focus our anger back towards ourselves, our individual failings. We are all to blame, collectively and individually. Our banks, our neighbors, and many of us lived a life of cheap credit and easy money — a life we could not afford. The demon lies not in the guilded towers of Wall Street, but in our ourselves.

A (Really) Small Business Index of the Economy

One almost-compulsive habit I have is asking “how is business going?” whenever I have occasion to talk to the owner of a small business. These opportunities are frequent. Almost all of us run into small business owners several times a week as we shop, eat lunch and go about our daily lives. I could spin an academic story about why I frequently ask this question, but the real answer is that I grew up in a family that owned some small businesses and just find small business owners interesting people to talk to. An added benefit, though, is that you often get a faster and better sense of what is going on in the economy than the often-significantly-lagged government statistics suggest.  Alan Greenspan was well known for talking incessantly with business people, trying to figure out the next risk on the economic horizon. But he was talking to the CEO’s of the Goldman Sachs and General Electrics of the world. I am more likely to talk to the owner of a local Chinese restaurant. In fact, during the last ten days I have asked my compulsive question to the owners of

1. a Chinese restaurant
2. a dealership that sells mostly Vespa scooters
3. a not-too-small (20 people) software developer
4. a company that makes and markets some art and design products made of cardboard 

All reported a recent decrease in sales.  So, I am not waiting for the government statistics to tell me the economy is contracting.  While four small businesses each reporting that their sales are decreasing could be a fluke, I doubt it.  The economy is already contracting.

History suggests that increases in the rate of savings should soon follow. Now is a great time for public policy to focus on developing the infrastructure that helps savings become a habit. A sensible place to start is with small businesses and allowing their employees access to the same types of tax deferred retirement savings vehicles that the employees of large companies have. Acting now can help ensure that when the economy does come storming back, and most certainly it will, this new found thrift does not go the way of the dinosaur.

Savings and the Housing Crisis

One of the common explanations for the current housing crisis, and the subsequent sub-prime mortgage mess is that the U.S. was inundated with cheap money from overseas, a world “savings glut” that depressed interest rates and facilitated reckless lending.  There is a great deal of merit to this argument. There can be little doubt that U.S. interest rates were made low by the inflow of foreign capital, and that this contributed to consumers headlong rush into debt. It also helped create the business environment in which some of the more exotic, and risky, lending instruments looked safer than they were.

But this explanation is often put forward as the whole story when in reality it is a glass half full.

Americans also contributed to the current economic demise by having insufficient savings. Yes, there was a lot of capital (savings) sloshing around the economy, but precious little of it was coming from the bank accounts of U.S. households. If Americans would have had more savings, some of that savings would have been used to put down payments on houses. Instead of the millions of homes sold with essentially no money down many of these homes would be owned by people with equity stakes right from the beginning. Why does this matter? It matters because if you have a 20% equity stake in your house and prices fall you are a whole lot less likely to walk away from your house, allowing it to be foreclosed upon, than someone who has no stake and finds themselves with negative equity when prices fall.  Giving up on nothing is easier than giving up on something. The housing market collapse has fed its downward spiral with this nothing, the savings that never happened, the down payments that never existed.

When I wrote “Whatever Happened to Thrift” I discussed the posibilities of downward economic spirals fed by this lack of savings.  It occured sooner than I had imagined.  I suspect savings rates will tick up in the coming months. History teaches that countries that go through tough times save more money.  We are about to learn thrift the hard way.