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<< Previous   of   Next >>   ADVERTISEMENT   Related Stories • Ways to trim your gas bill 3/9/08   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, March 9, 2008 Consumer spending goes to the movies By James McCusker With gasoline prices edging toward $4 a gallon and Wall Street spinning from its subprime credit binge, this might be a good time to dump reality and give Hollywood make-believe a chance. As it turns out, we can learn something useful about the economy from the movie industry. We've all known for a long time that there are no new plots in movies. Hollywood is the world's largest recycling center. Remakes, either acknowledged or not, are frequent. The first version of the movie, "Brewster's Millions," was made in the silent film era by Cecile B. DeMille. It was subsequently remade at least five or six times, the last of which, in 1985, starred Richard Pryor. The basic plot is that the hero must spend a large sum of money in a short time -- a year in some versions -- in order to inherit an even larger sum. Otherwise, he gets nothing. To most of us in the audience, spending money would not seem very difficult at all. When you have lots of it, however, spending gets more redefined. Buying an expensive house, for example, isn't really spending at all. It is simply a balance sheet transfer, exchanging cash for another form of asset. In the movie, Brewster tries hard to spend money, but it often bounces back at him; turning a profit instead. Film stars experience the same thing when their overpriced homes turn out to be fabulous investments. While some rich people are remarkably adept at spending -- heirs and heiresses often set the standard for this -- most wealthy people find themselves constrained by three factors: habits, humanity and time. Their habits usually do not involve high-stakes gambling or holding lavish parties for people they don't know. More importantly, the number of hours in the day is the same for wealthy and poor alike. And, lastly, there are human constraints that affect all of us. The guy with millions may have fewer financial headaches, but he can't eat ice cream faster than anyone else. There is a tendency, then, for spending to slow down markedly as income rises. Even though entire industries rise up to supply luxury goods to the wealthy, individuals and households with more money, on average, tend to spend a smaller portion of it. This tendency was obviously known to film makers, but economists didn't catch on so quickly. In his 1936 book, "General Theory," economist John Maynard Keynes put a spotlight on the phenomenon and called it the "marginal propensity to consume." And although his version never made it to the big screen, it is really important in setting economic policy. W. Michael Cox and Richard Alm from the Dallas Federal Reserve Bank have been looking at the spending data compiled by the Bureau of Labor Statistics and sorting out the policy implications. What they ended up producing was a remake of Keynes' theory. There are some plot differences -- or, more accurately, plotting differences, that change the shape of the consumption function on a graph -- but essentially we're looking at a solid remake. In the economy as in Hollywood, though, remakes are often good. If a concept was valuable before, it is likely to be valuable today. One of the things that Cox and Alm discovered is that when you look at income distribution you get one picture of the economy; when you look at consumption you get another. The top fifth of American households earns 15 times as much as the bottom fifth, but, spends only four times as much. The top fifth only spends a small part of its income; the rest gets saved one way or another. The bottom fifth, on the other hand, finds ways to spend more than it earns; mostly through selling assets, taking on debt and withdrawing from savings. Cox and Alm use their analysis to suggest that the gap between rich and poor isn't as great as it appears, and that the measures of poverty that we use are outdated and no longer applicable to our economy. Perhaps that is so, but another significant thing about the data is that the bottom fifth of our income earners is economically unsustainable and statistically unstable. Borrowing and liquidating assets do not work well for very long. That means that millions of people are constantly moving into and out of that bottom fifth. We need to know a lot more about how that works before we can develop economic policies that make sense. In our economy, just as in Hollywood's, remakes can be a good thing. Keynes was right about consumer spending and he deserves a comeback. And, if he can do it, maybe someday Westerns will come back, too. How does that Statler Brothers' song go? "Whatever happened to Randolph Scott?" James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.

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