Getting the Small Picture

Micro-economics tells us that a major reason for our current financial troubles is that individuals and families have been living beyond their means. We have been buying bigger and pricier houses, cars, boats, vacation homes, whatever, with smaller and smaller down payments. Then to put stuff in the houses we ran up credit card debt until it became ordinary to carry a $10,000 balance at an astronomical interest rate. When that credit ran out we refinanced our homes, and when the credit we needed exceeded our ability to repay, we resorted to liar loans, no-doc loans, NINJA loans and all the other shady offerings of the last, sub-prime convulsion of the system before it caught fire and burned.

According to micro-economics, we individuals would have been better off to have saved more (economists have been bemoaning the US savings rate for decades), to have bought only what we could afford (smaller houses, no Hummers), and to have established equity in what we did own (remember when 20% down for a house was the minimum?). Such behavior, it is widely argued, would not only make us better people, it would have kept us financially safe through the recent meltdown — as, indeed, an uncelebrated number of people have been.

Micro-economists have reason to rejoice. Sales of ostentatious McMansions, and Hummers, and vacation houses, and enormous flat-screen TV sets have stopped. Substantial down payments for modest houses are required again. People are cutting up their credit cards and socking money away for an even rainier day. At long last, harsh experience has imposed tough lessons and better behavior.

But wait! Why are the macro-economists in despair? Because what the micro people see as ethical behavior leading to personal salvation, the macro people see as the road to Hell and the next depression. The macro-economy cannot recover to its former volume and growth rate unless the micro people resume their former spending habits. That’s what President Obama and others are really taking about when they speak of “jump-starting” the economy, as if this vast beast were exactly like a recalcitrant motor bike.

The Washington macro people have been spending imaginary money like drunken imaginary sailors to get banks lending again. Lend! and Spend! is the cry of the macro people, forget thrift, forget savings, the only way to get through this critical shortage of money is to give more money to people to spend. If we need more money to give to people we can always refinance the country because it will always appreciate. As they used to say in Britain, safe as houses.

So what’s a patriot to choose? Wanton spending in pursuit of life as it used to be? Or stern frugality in pursuit of a life that can be sustained? Apparently it depends on whether you’re a macro person or a micro person.

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