13, No. 1, December 2011
Crisis in Consumption OR American Capitalism: A Sociological Perspective on the Consumer-Led Recession
Robert D. Manning
Responsible Debt Relief Institute
With the onset of the fifth year of the Great Recession, it is surprising how muted has been the voice and public policy influence of Sociology in general and sociologists in particular. For students of the Sociology of Consumption, there is an enormous opportunity to explore new theoretical and empirical approaches to the greatest economic crisis of the post-World War Two period. Like the examination of the social problems precipitated by Hurricane Katrina, sociologists could play an enormous role in shaping new generational expectations (challenge ethos of economic mobility), politically progressive mobilizations (Occupy Wall Street), environmentally sustainable policies (Green Energy), future patterns of reduced inequality (income tax reform), cultural mores (socially responsible consumption, greater savings), and prudent public policy (consumer protections, marketing regulations). This monumental project includes a wide-range of challenges at a multitude of levels including academic, intellectual, national, community, cultural, behavioral, and legal/statutory discourses. The current failure of the dominant economic paradigm offers an historic opportunity for Sociology to “Seize the Moment” before other perspectives and approaches gain greater “brand” recognition and are “consumed” with greater gusto and accompanying PR spin.
Competing Narratives of Current Societal Crisis
The most striking feature of the current economic crisis and attendant public policy discourse is the lack of “Sociological Imagination.” Intriguingly, the rational calculus of consumers and their households are portrayed as both the perpetrators and victims of the social “crime” of the Century; critical examination of Wall Street’s culpability were initially neglected/misrepresented in 2007-09 until the mountain of incontrovertible evidence was presented in prominent documentaries (eg, Danny Schechter’s Plunder , Charles Ferguson‘s Inside Job ) and now a succession of investigative reports. That is, the social “problem” of individual consumption has generated wide-ranging collateral damage via the collapse of the U.S. economy and its domino effect throughout the global financial system. The key question is the present and future role of mass consumption in the sustainable re-engineering of American society. This includes the future health and stability of the U.S. middle class as well as the power of Wall Street in the reconstruction of the global economic system.
While media pundits and politicians trivialized institutional and industry deregulation in the 1990s and 2000s, the consequences of exuberant consumer behavior—as portrayed by individual shopping splurges and excessive consumption—belied the inevitable economic catastrophe on the horizon. Rather than focus critical analysis on the dynamics of American Capitalism, it was much easier to present a morality play where the villains were unrepentant and undisciplined consumers; neither the Maestro of the Federal Reserve (Allan Greenspan) or the “rational” discipline of the market (with its intransigent laws of the business-cycle) were deemed to be relevant in orchestrating these calamitous events.
The most instructive aspect of the dominant narrative is that American consumers are simultaneously responsible for the cause and effect of the financial meltdown due to their dual responsible/irresponsible behavior that contributed to the recent phase of U.S. economic growth and prosperity (e.g., ‘over’ consumption) during the period of 2002-06. This facile perspective, however, ignores Lizabeth Cohen’s (2003) emergent post-WWII “Consumers’ Republic” that emerged as a socio-political response to American industrialization; it served to legitimate the rise of “Corporate Liberalism” and New Deal Progressivism that rewarded and eventually coopted rising political activism and unionization with higher worker compensation and material standard of living. By the 1960s, the rise of mass consumerism and the consumer rights movement laid the foundation of complex class, race, and gender politics that channeled political activism into “bread and butter” economic issues. Consumerism had become an active political “right” that expressed itself through a wide range of socio-political behaviors albeit constrained by the intractable demands of household budgets and access to consumer credit. More recently, Ben Barber (2008) bemoans that democratic citizen activism has been contained and even coopted through democratic consumerism that is mediated by the marketplace and mass media.
By the late 1990s, easy access to consumer credit (as fostered by banking deregulation) along with declining ‘real’ household income transformed the behavior of the Consumer Republic into aggregations of financially “irresponsible” households seduced by the Sirens’ Song of “over” and “hyperconsumption.” The Battle Hymn of the Republic shifted from producing, saving and prudent spending to “The One With the Most Toys Wins.” Studies such as Juliet Schor’s The Overspent American (1999) and Born to Buy (2004) implored Americans to rethink their priorities and downshift to affordable lifestyles that are not inflated by reference or status group comparisons. George Ritzer’s McDonaldization of America (1996) and Enchanting a Disenchanted World (2009) forewarned Americans that rationalized processes of production were intertwined with the socialization of irrational processes of consumption. The politically active artisans of the Industrial Revolution had been transformed into rationalized manufacturing robots whose primary purpose was to consume in the post-industrial society.
With the structural economic change of the 1980s and 1990s, American households responded to new occupational and economic reward systems with higher educated, two-income households with increasingly costly material standard of living. As foretold in Manning’s Credit Card Nation (1996, 2000), “over” consumption obscured new patterns of socio-economic inequality while laying the perilous foundation of a “house of cards” that inevitably crashed and burned both national and global financial systems that became increasingly dependent upon consumer “leverage.” This is illustrated by comparing the growth of “revolving” credit card debt with rising economic inequality as measured by the Gini Ratio. Interesting, the sharpest increase occurred during the Clinton Administrations (1992-2000); credit card debt nearly tripled while the Gini Ratio jumped from about 0.40 to 0.42. During the ongoing recession, credit card debt declined while the Gini Ratio surged from almost 0.43 in 2007 to nearly 0.47 in 2010.
Even so, the dominant narrative focuses on a marked behavioral shift in American society that mirrors a lack of long-term planning (low household saving), indolent consumption (immediate gratification), and declining individual irresponsibility (rise in personal bankruptcy, debt defaults). These economic and social trends are manifest in a 1995 “The Born Loser” cartoon by Art Sansom below. A young boy informs his friend that “We got a Gold Credit Card in the mail today! What exactly is so special about a Gold Card Anyway?” His friend responds sarcastically “That’s what they send you when you run your bill up over the limit of a normal credit card.” Hence, prior to the financial bubble of the mid-2000s, “over” consumption was limited to exhausting one’s household cash resources/reserves plus the availability of consumer credit at increasingly costly terms.
Hyperconsumption and the Double-Financial Bubble: Origins of the Consumer-Led Recession
In a February 2001 Oped in the Baltimore Sun, I described the resurgent U.S. economy as analogous to an ‘athlete on steroids;’ not nearly as powerful as its exaggerated growth implied. The key question, which received considerable national attention, was the speculative deleterious impact after the financial ‘steroids’ of easy credit wore off. It was my assumption that American households would assume an enormous debt burden that would propel the U.S. into a “hard” recessionary landing that would defy traditional policy prescriptions. Unlike recurrent “business-cycle” recessions, the unprecedented U.S. household debt burden would limit the stimulative effect of macro-economic tools whose primary goal is to create new jobs, reduce unemployment and increase effective consumer demand. Hence, the “Consumer-Led” recession would be shaped by the behavioral and financial constraints of household debt service obligations as well as the contraction in household credit capacity as lenders invariably reduced access to cheap credit. Indeed, for the first time in the post-World War Two period, the financial fuel that propelled the U.S. out of the 2001 recession was NOT due to higher real household income. As presented in Chart I below, which compares the growth of household consumer debt burdens (credit card, mortgage) with median household income (2010 dollars) during the three previous recessions (1981-82, 1989-91, 2001), Americans experienced a steady decline in real wages since 2001 while accumulating an enormous level of consumer debt—averaging over $100,000 per household by 2007. Significantly, escalating household debt levels were primarily driven by mortgage loans as the booming housing market became the engine of “hyper” consumption.
If real household income declined after the 2001 recession and the outsourcing of U.S. workers continued at an accelerated pace, then how did the U.S. economy generate millions of new jobs in the 2001-06 period? The key is the financial engineering by Wall Street that propelled the residential housing boom to unprecedented heights while shifting the risks of poorly underwritten loans to the wider national and international financial system through the sale of Asset Backed Securities (ABSs). This inspired the fee-based business model whereby banks received fees for originating mortgages, selling collateralized mortgage-backed securities, and servicing mortgage loans purchased by investors such as insurance companies and mutual funds. In the process, the U.S. government promoted homeownership as an accelerated household asset-accumulation program; residential homeownership jumped enormously from under 65% in 2001 to over 69% in 2007. Furthermore, average residential housing prices nearly doubled in only six years--to a high of over $220,000 in 2006—belying the historically annual average of about 2-3%. See Table I below.
The result of the U.S. economy on financial ‘steroids’ was the extraordinary growth in household credit capacity due to a profusion of “easy term” consumer credit: revolving “credit card” lines of credit more than double household income, no-money down auto loans, and ‘instant’ home equity loans (HELOCs), and residential Loan To Value (LTVs) ‘refi’ mortgages peaking at 125%. This led to the “Double-Financial Bubble” whereby high-cost credit (e.g., credit card debt) was easily refinanced into low-cost mortgages which was quickly cycled into increased consumer demand. Ultimately, during this unique period of overzealous lending—marked by underwriter irresponsibility--“hyper” consumption became a rational decision for struggling working, middle-, and upper middle-class families. That is, purchasing a house that exceeded their financial ability was a “responsible” decision since it would generate additional economic resources that would augment their declining real household income. In addition, the exuberant housing market financed access to better schools for children, participation in status competition through costly consumption goods/activities, unexpected personal/family crises (medical care, divorce, unemployment), and even investment capital for retirement planning.
As shown in Table II, the robust housing market was the catalyst for the “hyper” consumption of the 2000s by generating additional financial resources for ever increasing levels of household consumption. Incredibly, housing debt nearly doubled-- from about $5.3 trillion in 2001 to nearly $10 trillion in 2006—albeit almost $2 trillion was attributed to “cash-outs” and consumer debt refinancings. Of course, this expanded focus on consumer financial services further exacerbated the financial risk exposure of major banks as consumers were encouraged to refinance high-cost credit card debt into low-cost mortgage loans. For millions of Americans that did not anticipate the bursting of the financial “bubble” in 2007, they found themselves with little savings, high credit card balances, large HELOCs, and “upside down” mortgages. Without the ability to “Pay MasterCard with VISA,” consumer debt became quickly transformed into “toxic assets” that set into motion the unrelenting meltdown of the U.S. financial system in fall 2008.
The Sociological Challenge to Dominant Economic Discourse: ‘Spend Baby Spend’ OR Learn to Consume Wisely?
With the not unexpected failure of the 2010 federal economic stimulus plan, the “Sociological Imagination” has an enormous opportunity to promote (as expressed in trading parlance) a “counter-party” alternative to mass consumption as the primary option for the resumption of societal prosperity and political stability. That is, the current “crisis of consumption” reflects both larger structural changes in American society (shift from industrial manufacturing to services-based economy) as well as intensifying social pressures of globalization (higher unemployment, falling wages, collapse of welfare state). With the rise of the hegemonic discourse of the Neo-Liberal state, with its emphasis on expanded global trade and widening intra-national inequality, the centrality of consumption to the engine of political stability has not ever been so pronounced. Indeed, it is notable that the public and especially media shaped narrative that privileged the “science” of economics—with its emphasis on “Business Cycles”— in the early stages of the world recession has not acknowledged the bankruptcy of these presumed invariant and universal principles today.
Intriguingly, both Presidents Bush and Obama have raised the specter of Patriotic consumerism as a practical and immediate strategy for the recovery of the U.S. economy. As recently as 2009, who can forget Ben Stein’s pronouncement (has anyone ever won his money?) that the most effective way to promote economic recovery is by spending freely during the holiday gift-giving season; apparently, he forgot that the “multiplier effect” is most robust when consumption is based on production in the United States. Furthermore, there are enormous distinctions between incurring “good” versus “bad” debt as well as expending billions in public resources to encourage consumption by a citizenry whose credit capacity needs to be increased (to enhance consumer confidence) rather than reduced and, in the process, potentially precipitate a “Double-Dip” recession.
Look at my piggy bank!
Looks like my 401k account
As the ideological rhetoric of smaller government and deregulation have led to fundamental changes in institutional and individual behavior over the past three decades, there is no reason that a Hegelian synthesis—based on a broad-based backlash against the politics of ‘free-market’ individualism such as the Occupy Wall Street movement and the enactment of the 2011 Dodd-Frank Act—could not lead to fundamental changes in social attitudes that could profoundly influence the socio-cultural underpinnings of American consumption. For students of the Sociology of Consumption, the intellectual, professional, and policy “stakes” have not ever been so high or as exciting. For example, my ongoing research that empirically estimates household credit and debt capacity offers a promising approach for modeling sustainable consumption and socially responsible credit scoring systems. Ultimately, with renewed interest in our research and multidisciplinary approaches, the question that remains is whether it will be used to promote prudent and socially responsible consumption. Or, will it inspire market research that will be used to manipulate consumer cognitive responses and influence consumer behavior such as immediate gratification that contributes to unsustainable environmental degradation. While we debate the implications and applications of our research, let’s elevate the voice of the Sociology of Consumption as the ongoing national and international discourses so desperately need to hear it!
Barber, Benjamin R. How Markets Corrupt Children, Infantilize Adults, and Swallow Citizens Whole. New York: W.W. Norton & Company (2008).
Cohen, Lizabeth. A Consumers’ Republic: The Politics of Mass Consumption in Postwar America. New York: Vintage (2003).
Ferguson, Charles. Documentary, INSIDE JOB (2010).
Manning, Robert D. and Anita C. Butera. “Consumer Credit and Household Debt,” in Michael Shally-Jensen (ed.), The Encyclopedia of Contemporary American Social Issues, ABC-CLIO/Greenwood Press, 2010.
Manning, Robert D. “American Households Swimming in Red Ink,” The Baltimore Sun, February 26, 2001, p. A 25.
------------------------ . Credit Card Nation: Americans Dangerous Addition to Credit. New York: Basic Books (2000).
Ritzer, George. Enchanting a Disenchanted World: Continuity and Change in the Cathedrals of Consumption. CA: Pine Forge Press (2009).
-------------------, McDonaldization of Society. CA: Pine Forge Press (1996).
Schechter, Danny. Documentary, PLUNDER. (2010).
Schor, Leslie. Born to Shop: The Commercialized Child and the New Consumer Culture. New York: Scribner & Son (2004).
-----------------. The Overspent American: Why Americans Buy What They Don’t Need. New York: Harper (1999).
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Commodities & Consumption, Vol. 13(1) December 2011.