Is the Road to Recovery Unethical?

The recession is often blamed on the general culture of reckless spending Americans have increasingly developed over the past twenty years. As luxuries became necessities and illiquid assets became spending money, banks began to lend money to high risk borrowers at low interest rates. Everyone began to feel wealthy, thus cultivating the culture of wild consumption. The burst of the housing bubble brought reality to the forefront and yesterday’s irresponsible spenders began to understand the virtues of savings…and that is the nation’s newest problem!

As the economy faced a downturn, we began to save money rather than spend it. We feared the recession may plague our homes and the circulation of money came to a quick halt. This reaction, although rational, only pulled the recession to an even lower point. In order to pull the economy out of its bearish downturn, money must begin to move again, meaning you, dear reader, must forget about the good behavior of saving and begin to spend again. Stimulus plans and tax cuts are made to stuff the American pockets with fresh dollars to spend, thus stimulating the economy. In other words, to pull the nation out of this bust, the lavish spending that was only just criticized is being promoted. In the short run, only if you fellow Americans fall back into this consumer culture, will you save our economy. Ironic, isn’t it? Every serious economist will tell you: the goal, for the common good, is therefore to encourage reckless spending. The long term goal, on the other hand, is the exact opposite. In order to prevent this type of disastrous recession from occurring again, Americans must be taught to make educated and rational decisions when deciding whether to spend or save money. They ask us to learn from Japanese and Swiss consumers: spend only in proportion to what you can realistically afford! If people begin spending sensibly, the boom and bust cycle may be less volatile and more stable, soothing the disasters that recessions can cause. There is an obvious contradiction between the short term goal of pushing people into lavish spending to stimulate the economy and the long term goal of teaching people to spend only sensibly.

Ironically, Adam Smith in his grave is re-writing some basic economic concepts of free trade: he used to believe that if each consumer makes rational choices considering only his or her self interest, the community as a whole will benefit. In his book The Wealth of Nations, Adam Smith gave the famous example: “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Smith, often described as the father of capitalism, believed that if everyone in society acted out of self-love the community will profit. The butcher does not sell you meat to feed you, but rather out of desire to make money; the baker does not sell pastries for your pleasure, but rather for his profit. In his new post mortem vision Adam Smith believes that sometimes what is good for the individual is actually bad for the community. In times of recessions as well individuals act selfishly out of concern, and cut down on their spending, thereby increasing their personal supply of cash. As all individuals in the community make this rational and self-interested decision, the community as a whole suffers from a lack of consumer spending. In other words says our dear Adam Smith that the interests of the individuals hereby collide with the interests of the entire community.

So, when we stand to open to holiday shopping season the government is switching gears: please dear consumer, for the next three months, forget the new year’s resolution of being responsible and thrifty and pull the economy out of its ditch!!