Tuesday, February 3, 2009

Luxury vs. necessity

Now be warned, this post might not be so rational, probably more speculative.

Given people's perception of a coming recession, they cut back spending. Suppose we classify those spending cutbacks as either necessary or luxury purchases. It's difficult to cut back necessities like heat, electricity, bread, milk, etc. Compared with that, a new television is much harder to justify.

It makes sense that necessity suppliers will fare better than luxury suppliers; some economic sectors and companies are more recession-proof than others.

So, should we stimulate luxury purchases? I doubt many people would be happy about subsidizing ANY luxury purchases for ANYONE. But the employees of luxury suppliers aren't all rich either. They need people (or companies) to purchase their luxury goods so they can buy necessary ones.

OTOH, it's difficult to stimulate necessary purchases. Oil is cheaper now, but you can only turn your thermostat up so far, you can only drive so many extra miles.

GST and personal tax cuts would seem to make sense. The extra money is disposable, "found" money which could be used on luxuries. But people don't have to spend that money, they have the option to save it.

So here's the question: are savings necessary or luxury?

I believe savings are either luxury or necessary, relative to how much you've saved already. Excessive savings could be luxury; retirement funds are necessary. If you think your retirement or rainy-day accounts are to low, or if you feel your job is at risk you might save as necessary. If you've saved enough for necessities you might still save rather than increase your luxury purchases; if you're that wealthy, a small tax refund won't do much to change your behavior.

So if tax cuts won't save the luxury sectors, what about government infrastructure spending? I doubt shovels in the ground will stimulate purchases of crystal artwork either directly or indirectly. Any trickle down from government contractors and their employees will probably have little benefit to the luxury sector.

So I think neither tax cuts nor infrastructure spending will boost the economy much. I think infrastructure spending might be a good idea anyway even if it isn't stimulus, if it's spent on necessary infrastructure and if the recession provides a "buying opportunity" as Mr. Harper suggests.

I think we just have to wait it out, until enough people have enough pent-up demand for luxuries. It'll happen eventually, and I don't see any way to arbitrarily accelerate it.

And thanks to Red Tory for re-kindling my inner Monty Python fan.

Will our children remember these days like the four Yorkshiremen?