Fighting The Urge to Splurge

By Stephen Koepp

December is usually no time for second thoughts about shopping. This is the merry month of mall hopping, a season of spending all the money that has been larded away -- and then some. But wait: this may not be Christmas as usual. America's jingle-jangle shopping spree seems muffled so far this year. As customers browse among the cashmere sweaters and compact-disc players, many are having doubts not only about this month's expenditures but also about their whole philosophy of buy, buy, buy. The October stock-market crash and the likelihood of an economic slowdown next year have rekindled the feeling that Americans must reform their spendthrift ways. "Consumers are so far out on a limb," declares Economic Consultant A. Gary Shilling, "that the crash has shocked them into an agonizing reappraisal of their conduct."

Even though superheated consumer buying has helped fuel the economic boom of the 1980s, the heedless lack of saving also poses serious dangers. With too few reserves to fall back on, consumers might have to restrict their spending severely during a recession and thus aggravate the downturn. Other harmful side effects have already shown up. Profligate consumer spending on imported goods has ballooned the U.S. trade deficit, while the dwindling national pool of savings has forced America to borrow from abroad to meet its financing needs. Says Investment Banker Peter Peterson, a former Commerce Secretary: "Correcting the current imbalance assumes that America can embark on an enormous shift from consumption to savings. I hope we don't have to have a national crisis to reach a national consensus."

Curing the urge to splurge, says Harold Nathan, an economist for Wells Fargo Bank, will be a "painful, grueling process," since American consumers have so many incentives to spend rather than save. Easy credit, proconsumption tax policies and an ethic of materialism have collaborated to turn the 1980s into the Spree Decade. "You work to have what you like, when you like," explains Nino Merenda, 31, a hair stylist in Skokie, Ill. "At this stage, I'd rather have a nice car than money in the bank." In fact, Merenda owns two cars: an Alfa Romeo and a Fiat.

U.S. consumers are socking away only a token portion of their paychecks. Measured as the percentage of after-tax income that is not spent, the U.S. personal saving rate dropped from 9% in the mid-1970s to 5.1% in 1985 and a shocking 2.8% in the third quarter of this year. "We have always had a fairly low saving rate, but the current drop is very large," says Economist Barry Bosworth of the Brookings Institution. The personal saving rate looks especially paltry when compared with the thriftiness of such major trading partners as Japan (15%) and West Germany (13%).

Personal reserves are only one part of the larger pool that the nation draws upon for investments in capital projects and new businesses. Since corporate and government saving also help fill the pool, a decline in thriftiness on the part of households might normally be offset by surpluses in other parts of the economy. But the downturn in personal saving comes at a time when the Federal Government is doing even worse, running budget deficits that have totaled nearly $1.3 trillion so far during the 1980s. Result: America's pool of savings is inadequate for the country's investment needs, forcing the U.S. to borrow more and more money from abroad. America's net foreign debt, nonexistent only three years ago, is expected to jump from $264 billion in December 1986 to more than $400 billion by the end of this month. Says Sheila Tschinkel, director of research for the Federal Reserve Bank of Atlanta: "What we're doing is relying on other people's savings, and future generations in the U.S. are going to be worse off because of it."

Consumers may at last be ready to start curbing their spending. When the Christmas shopping season went into full swing last week, retail sales were lackluster despite boisterous promotion and discounting. At many stores the growth of revenues is not even keeping pace with 1987's inflation rate of about 5%. Sears reported last week that its November receipts rose only .7% over the same month in 1986, while J.C. Penney showed 4.3% growth. "People are looking more than they are buying. There is a level of concern and nervousness that wasn't there last year," said Mark Shulman, president of Henri Bendel, a tony New York City department store.

Business may pick up as the holiday draws nearer and memories of Black Monday grow fuzzier. But consumer confidence is getting no boost right now from the stock market. The Dow Jones industrial average took several dizzying downward steps last week, including a 76.93-point drop on Monday that ranked as the eighth largest one-day fall ever. For the week, it tumbled 143.74 points to close at 1766.74. The Dow is now just 28 points above its Oct. 19 nadir, and broader indexes of U.S. stocks are performing even worse. Shares on the American Exchange and over-the-counter market have fallen almost 20% below their Black Monday level.

The prospect of dreary Christmas sales and a slowing economy dampened the market so much that it shrugged off several bits of good news. The civilian unemployment rate dipped in November from 6% to 5.9%; it has not been lower since July 1979. Moreover, West Germany's Bundesbank announced a cut in the discount rate that it charges on loans to banks, from 3% to 2.5%. That move, along with reductions by six other European central banks, could help boost the world's flagging economic growth.

Perhaps at no other time in the 1980s have economists focused such an intense spotlight on consumer behavior as an indicator of the economy's future prospects. Consumer spending, which constitutes two-thirds of the $4.5 trillion U.S. economy, has been the engine of American growth in recent years. Since a long overdue return to thriftiness would put a damper on the economy, a too rapid conversion could be dangerous. "If everybody got religion and cut their spending 10%, we'd have a recession. Gradual change is what we need," says Cynthia Latta, senior financial economist for Data Resources, a forecasting firm.

In fact, America's shopping habit has become so ingrained that any lasting reversal may take a while. After the long-running, sunny times of the early '80s, many consumers feel little need for rainy-day reserves. Karen Peters, 43, of Orange, Calif., earns $48,000 a year as a county executive but typically keeps less than $1,000 in savings. On a recent trip to Santa Fe, she dropped $3,000 on a lithograph and a turquoise necklace. Says Peters, a widow who spends a portion of her income to help support her mother, 67, and daughter, 21: "Having money in the bank doesn't do anything for me. I figure I owe it to myself to enjoy myself."

Attitudes about saving differ strikingly between members of the baby-boom generation and their parents. Barton Goldberg of Delray Beach, Fla., a retired retailing executive, and his wife Rita recall saving a $1,800 nest egg in the 1950s on a salary of only $13,000 while living in New York City and rearing two children. When the family moved to Virginia, where living costs were much less, the Goldbergs were able to save nearly half of Barton's take-home pay. Says their daughter Jane Warden, 34: "My parents were very big bargain hunters. My mother would wait and watch for something until it went down, and then she would go and get it."

In contrast, the daughter, a part-time clinical social worker, and her husband Richard, 40, a hospital administrator, see no reason to put off life's rewards. The Orlando couple saves almost nothing, despite a household income of more than $100,000. The Wardens plan to take a Utah skiing vacation this winter, on credit, and aim to move up from their $133,000 house to a model that costs $200,000 or more the minute they can afford it. "We're not satisfied just to be comfortable," says Richard. "Compared to our parents, we really live on the edge."

Yet Americans are not spendthrifts out of pure whimsy or decadence. Over the past several decades, U.S. consumers have been influenced by fundamental social and economic forces. To begin with, the Viet Nam era bred a mood of pessimism and cynicism that led many young people to live for today rather than save for tomorrow. Next came the inflation of the 1970s, which pushed prices up 87% in one decade. Consumers became accustomed to buying in a hurry because prices were always rising. Even as inflation has cooled off in the 1980s, the manic shopping reflex continues, notes F. Thomas Juster, an expert on savings behavior at the University of Michigan.

A major incentive to spend is America's income tax structure, which does more to reward consumption than almost any other system in the world. The Government taxes savings twice: first as income, then again on the interest that the money earns in the bank. At the same time, the U.S. has historically encouraged borrowing by allowing consumers to deduct the interest they pay on installment debt. "Certainly there was no excuse for allowing this," declares Economist Rudolph Penner of the Urban Institute. That provision, which made it easier for taxpayers to rationalize running up big balances on their credit cards, is being phased out under the 1986 tax-reform law.

America's biggest tax incentive to spend may be the unlimited deduction on mortgage interest. This sacrosanct loophole has fulfilled the worthwhile ideal of widespread home ownership, especially for first timers, but has encouraged people to make disproportionately large investments in housing instead of putting their money into the savings pool. Most other industrial countries impose limits on the mortgage interest that can be deducted. The U.S. mortgage-deductibility provision, contends Economic Commentator Robert Kuttner, is not only antisaving, but inflationary and inequitable as well. Wrote Kuttner in his 1984 book The Economic Illusion: "The effect is to fuel ; housing speculation, drive up prices, and to disproportionately help rich people lower their tax bills. This has the perverse consequence of pricing housing beyond the means of poorer people, and at the same time it soaks up savings that might better be used elsewhere."

While a person's house is a nest egg, since it can be borrowed against or sold, the huge appreciation of real estate values in the 1970s tended to lull U.S. homeowners into the belief that they did not need financial savings as well. The roaring bull market of the 1980s has also contributed to that attitude by creating a so-called wealth effect in which stockholders feel rich on paper. The catch is that home values and stock prices can fluctuate, often cruelly, even though their growth seems so dependable during some periods. Says John Godfrey, chief economist for Barnett Banks of Florida: "If the stock-market crash did anything, it showed us that we can't count on that value being there."

In addition to the tax code, demographic changes have no doubt contributed to the savings drought. The baby-boom generation -- the 76 million Americans born between 1946 and 1964 -- is in its peak spending years right now. According to the so-called life-cycle theory of savings behavior, people tend to do their heaviest borrowing and spending from their mid-20s to mid-40s. Then, after their children are grown, they start saving for retirement. Many economists predict that when a huge number of baby boomers reach middle age in the 1990s, the level of U.S. saving will improve.

Other scholars contend that the low saving rate is mainly a problem of definition. Much of today's saving, they say, has become institutionalized through corporate pensions and profit-sharing accounts. But the money that companies contribute to these plans on behalf of their employees is not counted by the Government as personal savings. Moreover, some economists point out, consumers are big savers in comparison with the free-spending Federal Government. Declares M.I.T. Economist Franco Modigliani, who won the Nobel Prize for his research on the behavior of savers: "It is the Government that is gobbling up our savings with its huge budget deficits."

Yet many American consumers have clearly shopped beyond their means. Adjusted for inflation, personal spending grew 21% between 1980 and 1986, while disposable income during that period rose only 17.6%. One reason is that consumers cannot seem to keep up with all the shiny new temptations. Never before have they been offered so many innovations to make life easier or more comfortable: cellular phones, cappuccino makers, home computers, hot tubs, Nautilus machines, camcorders, stereo TV sets, trash compactors, snow blowers. Giving in to impulse buying is easier than ever. The outlets are ubiquitous: shopping malls, mail-order catalogs, toll-free numbers, home-shopping networks, direct mail. Even a consumer's credit card bill, which contains the bad news about spending, is packed with offers for more merchandise.

The time between the introduction of a new product or service and its acceptance as a mainstream must-have has grown remarkably short. Case in point: some 45 million U.S. households, or 50% of the total, now own videocassette recorders. Says Lillian Mohr, director of the Center for Economic Education at Florida State University: "Young people have redefined the 'necessities.' I hear them talking about how they 'need' a VCR or to go somewhere on vacation."

During the early 1980s Americans developed a pronounced taste for imported goods, stimulated by the strong buying power of the U.S. dollar. Moet & Chandon champagne could be fetched for a bargain $13 a bottle, and sales of everything from Porsches to Paris designer dresses simply zoomed. But now that the dollar has declined some 40% against major currencies, the U.S. consumer's affinity for imports has grown far more expensive. Alas, Moet in Manhattan now goes for more than $20.

By far the most dangerous lure is credit, which comes much more freely to U.S. consumers than to their counterparts in other industrial countries. Many Americans who lack willpower tell how easily they got into trouble by accumulating a dozen credit cards or more. Consumer installment debt ballooned in recent decades, from 7.3% of disposable income in 1950 to 14.7% in 1970 and 15.5% in 1980. In mid-1987 it stood at a record 18.8%, or $591 billion. Credit card companies, aiming to make consumers feel virtuous rather than guilty as they use their plastic, have even introduced new accounts in which a percentage of each purchase price goes to the cardholder's favorite charity or special-interest group.

Many economists think America's affinity for spending is a deep-seated cultural instinct. Since income is often regarded as the ultimate measure of success, people want to demonstrate outwardly their earning (and borrowing) power. "This is a society that tends to judge people by the way they spend $ money. There's very little reward psychologically for being a saver," says Rick Hartnack, senior vice president at the First National Bank of Chicago.

But as a matter of policy, how can the U.S. make saving more attractive? Perhaps the most popular suggestion calls for restoring the tax-free Individual Retirement Account contributions that were sharply curtailed under last year's tax-reform law. Introduced in 1974 and liberalized in 1981, IRAs became immensely popular as income shelters. Total IRA contributions grew from an estimated $28 billion in 1982 to $45 billion in 1986. Many economists argued, though, that IRAs did not spur new saving, but simply encouraged the shifting of funds from other investments. Advocates of the retirement accounts, however, contend that IRA contributions were just beginning to spur greater thrift when they were restricted in 1986, and that they would provide a powerful stimulus for saving if restored. The problem with restoring the IRA deduction is that the tax break would swell the federal deficit unless the change was offset by other revenue.

A more sweeping strategy to boost saving would be to shift some of the tax burden from income to consumption. One method might be the imposition of a national sales tax, which would work like state levies. Another model is the value-added tax used in many European countries. The VAT is paid at every point in the production and distribution chain where a product's value has been enhanced. Consumers would pay their share at the retail level. But as sensible as those or other consumption taxes may sound, they are too dicey politically to have much of a chance in Congress.

For the time being, if Americans increase their saving, they will be doing so voluntarily. At least some consumers are already showing signs of disillusionment with the rat race of materialism. Fear of hard times may be a growing incentive to save, along with anger over America's economic weakness. One New York savings bank, Dollar Dry Dock, was playing on those emotions in a recent full-page newspaper ad: IF YOU WANT TO HELP YOURSELF AND CONTRIBUTE TO BUILDING AMERICA'S ECONOMIC STRENGTH, CONSIDER 'SOCKING AWAY' A LITTLE MORE OF YOUR INCOME. A shrewd pitch: saving is not only savvy, but patriotic to boot.

With reporting by Richard Hornik/Washington and Wayne Svoboda/New York