Shopping with the children

Happy New Year! I hope everyone had a great holiday. For many people, last year was like the bad hangover that follows an all-night binge, so I'm certainly looking forward to a brighter 2010. But before we turn the page on 2009, I have one last story to relate from last month.

A few weeks before Christmas, I took my two boys shopping for gifts. We stopped at Best Buy and they immediately took off for the video game aisles. When I went to find them a little while later, they began asking why we couldn't buy ourselves some games. So I tried doing the dad thing and patiently explained that Christmas is about sharing with others, not getting stuff for us, et cetera. Besides, I told them, we can't just spend all our money on treats or we might get caught short if something bad happens.

My 10 year old son, who can talk a rabid dog out of a stew bone, wasn't about to give up on a new Wii game so easily. He told me he'd heard a news station encourage people to spend money and help the economy. "You do care about the economy, right Dad?"

I was immediately glad to discover he pays more attention to current events than I thought. However, this new tack disturbed me, so I asked him how spending money would make the economy better. He replied that if everybody bought lots of things, then people would get jobs making the stuff we buy. I told him to look closely at a nearby box of earphones, and he read "Made in China" on the back. I asked him who would get jobs if we bought that. He thought about it and replied that the Chinese would get jobs, but we might get some too. Fair enough. So I asked him where we would get the money to buy the earphones, and he smirked and said we have enough to cover the $27 price. I said ok, but one $27 set of earphones won't create enough work to fix the economy. How do we get enough money to buy stuff so everyone has a job?

Now he was closing in for the kill. He arched his eyebrow and replied, "that's why you and Mom have credit cards." He stood there, smug, waiting for my capitulation. See, the lad had sass.

I mentioned that we'd have to buy a few thousand boxes of earphones to pay for a single new job. Who would pay $27,000 back to the credit card company when all we created was one job? He looked at me quizzically and asked, "We have to pay them back?" Checkmate.

I shouldn't have been surprised that society is prompting my kids to spend money. Politicians, columnists and even some otherwise reasonable economists enjoy reminding us that consumer spending accounts for about 70% of the U.S. economy. CNBC regularly rants about how retail sales affects the S&P 500. Now, that's all technically true; Gross Domestic Product is the value of all the goods and services we create, and bigger GDP means more wealth. Economists will tell you that the easiest and best way to measure that value is by counting all the dollars we spend on stuff. They reason that if you buy it, somebody had to make it and that's what it's worth. That makes sense, sort of.

But as most parents must eventually explain to our kids, what we produce and what we consume are two very different things. Production, the value we create, puts money into our pockets. Consumption is the opposite of production, and takes money out. (You might argue that some spending is really investment, but few of us would successfully argue that their new 54-inch flat screen HDTV "investment" is creating anything except a bigger Visa bill.)

Calling the wealth we create in a given period equal to what we spend is like assuming that we bought a new house with last week's paycheck - it's simply not realistic. We don't just spend the cash in our pocket. What we have available to spend relates not only to what we created in any single year, but also to wealth accumulated from the past and to loans we take that are payable into the future.

And that's where the whole idea of stoking consumer spending to increase GDP gets hairbrainy. Spending versus making will prop up GDP in the short run, but spending anything more than the real value created eventually dissipates wealth and leaves a pile of bills to pay. So by mortgaging our homes to buy HDTV's, we make the economy look good today but deplete our assets and future wealth. In short, GDP only looks at the income statement without checking the balance sheet. Managing a household on that basis would put us onto the street; managing the whole country that way is bad policy leading to bankruptcy.

So with that in mind, how does a few points of GDP growth look against the $1 Trillion of new debt we spent to get it? Are you any more confident in your job prospects? Are you better off financially?

Like my kids, sometimes even reasonably intelligent adults will trade reason for immediate gratification. But perhaps we'd be less inclined to spend if someone reminded them that the trillion dollar credit card must eventually be paid.