On The US Economy & Recessions

Recession is defined as "the state of the economy in decline" or "a widespread decline in the GDP and employment and trade lasting from six months to a year" or "a period of reduced economic activity."

If you watch the news for any amount of time these days in America, it tells us over and over that our economy is in trouble. We have had bank bailouts, auto bailouts, Obama calling for swift economic action in his new administration, and hell...we have even had calls for porn bailouts.

Since we are in such "dire trouble", everyone wants a free handout these days. If not, then the economy could perish...right?

The current rationale is that since we are in a recession -- a period of economic decline -- we need things to help stimulate the economy. The US has gone through many other declines in its economy in its history, so we must take swift action to get it back on track.

But this has got me thinking...why are we in a recession? What is driving this decline in our economy? According to a speech by George Bush, consumer spending drives 70% of the U.S. economy. Think about that for a second. All the crap that you and I buy -- food, clothing, TVs, iPods, furniture, houses, etc. -- all that stuff drives almost 3/4 of the economy. So, if regular people like you and me don't spend our money, then the economy stalls.

Another thing is that people in the U.S. are notoriously poor savers. This article from 2006 put the personal savings rate at -.5%. At that time, the total consumer debt was at $2.161 trillion dollars. That is not a lot of savings and even more debt. Historically, people have tended to rack up lots of credit card charges to fund the purchases of all the stuff that drives the US economy. Because as we've seen, the savings rate from two years ago was negative, so people have tended to spend just about even dime that they have.

Here is the point that I've been leading to: what is the difference between a "recession" and the decision by Americans to decrease their spending and increase the amount of money they save? Think about that for a second. Consumer spending is 3/4 of the economy, so if people stop spending and start saving, then there is going to be a big impact.

Let's do some rough calculations.

Currently there are an estimated 153 million people in the U.S. workforce. The GDP for the U.S. in 2007 was an estimated $14 trillion dollars. If each person in the workforce saved an average of $10/day for a year, that would come out to about $559 billion over a year. Finally in dividing $559 billion by $14 trillion, you end up about 4%. So if everyone in the workforce saved an average of $10/day, that would result in a 4% reduction in GDP. That's pretty sizable considering the economy has grown at a rate of 2-4% per year over the last decade.

All I'm trying to point out is that when Americans (if they ever do) start saving, it's going to cause a lot of problems for the economy. Then, we will have future administrations send us our "stimulus" checks to held encourage us spend money. But if we save instead of spend that money, it will have no benefit in the short-term in trying to help the economy recover. Maybe we have too many people in our country. Our previous growth has been financed by consumer debt that can't last forever. If we start saving, what will happen?