My old pickup died Monday evening. My response to this emergency makes for a case study in both micro- and macroeconomics. Micro — how do people decide what to spend their money on? Macro — how is consumer behavior affected by national economic conditions? How, in turn, do millions of consumer decisions collectively influence national economies?
The truck was a 1990 model with more than 165,000 hard miles. I noticed transmission noise at Shakopee that got progressively worse through Jordan, Belle Plaine and Le Sueur. I gave up at St. Peter after a quick tap at the transmission case with a wetted finger resulted in a sizzle and a burn. I needed a new vehicle.
I didn’t need anything fancy, however. My wife and I have a good 1996 sedan. Self-employed, I don’t have a regular commute. I just need to run errands, perhaps go camping and get down to and around the farm in the summer. It is handy to be able to haul sheets of plywood or drywall. Having four-wheel drive is useful on the farm. All I needed was another used pickup, perhaps something in the $6,000 range.
I ended up with a much more expensive vehicle, and Thorstein Veblen could explain why. One of the first great U.S. economists, Veblen grew up just to the southeast of where I was driving Monday night. After graduating from Carleton College in Northfield in 1880, he went on to graduate work at Johns Hopkins and Yale.
Veblen understood human nature. Coining the term “conspicuous consumption,” he argued that people buy some things not just for the intrinsic satisfaction of needs that these goods provide, but also for the fact that owning them excites the admiration or envy of other people.
I just needed a serviceable pickup. A quick search of the Internet produced one out in Shakopee that was only 3 years old. It was big and shiny, with chrome rims and a V-8 with considerably more power than the tired old six-cylinder in my now-defunct 1990 model.
In the United States, a rusty, dented 16-year-old vehicle sagging on too-often-overloaded springs has “loser” written all over it. A glistening, new model that practically requires a stepladder to enter says you are successful, powerful and manly. You must be an important person if you drive a vehicle like that.
At least that is what automobile advertising would have us believe. And such advertising is successful. Yes, there were practical reasons for buying the pickup I settled on. It had less than 23,000 miles and was only 3 years old. Despite the chrome wheels, it is a fairly utilitarian vehicle that will meet my needs for at least a decade. And while my neighbors are razzing me about my upscale move vehicle-wise, it really won’t turn many heads on the street.
Buying it was not a completely irrational decision. But I must be honest. As I tooled down 169 on a short test run, I certainly felt some Veblenesque emotions. Wow, this really was a cool truck!
My decision to spend more than twice as much as I had planned was also a function of interest rates. Fortuitously, just a few days before Old Blue died, we got a postcard from the credit union offering car loans at 4.3 percent.
If I had not been able to borrow money at nearly 3 percentage points less than any other previous car loan in my life, I probably would have looked for something practical in the $6,000 range. But with money so cheap, why not buy something a little better? The monthly payment will still be manageable.
Low interest rates motivate consumer spending, and economists are no exception. A “perfect storm” of lax U.S. monetary policy, cheap Asian manufacturing that suppresses inflation and Asian central bank financing of U.S. residential mortgages and government deficits has supported an orgy of consumer spending in the U.S. over the past few years.
That is good for short-term output and employment. More people have jobs, and the gross domestic product is higher than if interest rates were not so low. Whether that is good for the economy in the long run is more debatable.
Many Americans have made the same calculation I did. Renting money is cheap. The payments will be manageable — if interest rates don’t rise, we all stay healthy, I don’t lose my income, and prices of necessities don’t increase inordinately. U.S. consumer indebtedness is at historic highs by many measures.
Some of the world’s best economics commentators have been warning for more than a year in publications such as London’s The Economist and Financial Times or the Frankfurter Allgemeine Zeitung that the U.S. is headed for an economic bloody nose. Alan Greenspan and colleagues in the Federal Reserve respond that the U.S. economy is growing well, that household debt levels are high but manageable, and that the slow tightening of monetary policy will prevent any emergencies.
In economic predictions, time always will tell. In another year or two we will know who was right. In the meantime, I’m going to go for a little drive in my new truck.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.