Economist House Call: Afraid To Spend

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As anxiety about the economy has risen in recent months, consumer spending has fallen sharply. Yvonne Hemsey/Getty Images hide caption

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Americans are feeling the effects of the financial crisis — whether it's because of a dwindling 401(k) or a home that's lost value or a job that's not so secure. But how do their individual situations connect with the bigger picture, and what can they expect in the coming months and years?

Simon Johnson, a professor at the Massachusetts Institute of Technology and former chief economist of the International Monetary Fund, helps put listeners' personal situations into a larger global context. Johnson joins Planet Money's Adam Davidson and Laura Conaway to field a question from Jesse Kachapis, a software developer from Rhode Island.

Jesse Kachapis: I'm happy right now compared to everything else that I see. But in the last 45 days, I've cut my spending. I was an early adopter; I've owned every version of the iPod. In the past, a recession would come on, and people would know about it once we're in it. Most people weren't affected by their housing value going down 20 percent. But this downturn has been so advertised.

Laura Conaway: Is the advertising of the recession having an effect here?

Simon Johnson: Yes, it is, and a lot of retail consumers are feeling the same way Jesse and his wife are feeling. I would like to gently encourage Jesse to go back into the stores and spend. Apple was saying iPod spending was still pretty good, so if people want to continue buying technology products, which drives innovation, we should be OK.

That said, we haven't seen anything like it in this country since the late 1970s/early 1980s. I don't think we've seen these issues around the banking system since the 1930s. I don't think we're in for a reprise of the 1930s — Ben Bernanke is stressing that we've learned the lessons. And the key lesson is: Don't let prices fall and debt burdens get worse.

But what are the policies we're going to see in the next few months that are going to pull us out of this? And to what extent is the government going to step in and take some responsibility for buying? That's the whole point of the fiscal stimulus. But how much can the government do and how quickly? That, we don't yet know.

Adam Davidson: Jesse is actually making as much money. But you're cutting back spending because of a feeling of anxiety.

Kachapis: I'm looking 12 months ahead and saying if one of us loses our jobs, that we'll have enough money to get through it alive.

Davidson: You're creating the condition you're afraid of — a self-fulfilling prophecy. If we could give everybody a pill and make them feel confident, would that solve the problem?

Johnson: It would help for a while! People are worried about their jobs and their spouse's jobs. There's an enormous amount of uncertainty that's been generated just in the last six weeks. All sorts of things we thought we could take for granted have been thrown into question, and we desperately need to get some stability back. Some positive, more assertive measures from the government would be helpful. I think we'll regain the psychological equilibrium in January or February.

Davidson: To what extent is a recession some real thing that's actually happening, and to what extent is it just psychological, just anxiety?

Johnson: There's always a real thing going on, and the issues are exacerbated by various kinds of anxieties. Housing got a bit overheated, and housing prices needed to come down. Those problems got multiplied several times by the fact that key parts of the financial system had taken on far too much risk. Then you had the particular handling of Lehman and AIG. Creditors in particular took big losses on what they thought were safe investments. That created a big crisis of confidence around the world.

So these are real things that become psychological, that become self-fulfilling. You can stop it to some degree by restoring confidence. That's what the G-7 countries are trying to do. Unfortunately, the metaphor of letting the genie out of the bottle is a good one. It's hard to persuade the genie to get back in the bottle. Genie is out and having fun, and the same is true with anxiety: It's running around, and it takes a while to round it up and get it back in the bottle.

Davidson: All we have to fear is fear itself . . . and the underlying things causing that fear!

Put your personal situation in a global context by taking part in an Economist House Call. Just e-mail NPR's Planet Money, and be sure to include a phone number where you can be reached.

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