(IDEX Online) - New Year’s resolutions are made to be broken, especially when they relate to losing weight or cutting back on spending.

 

For the past two years, shell-shocked American consumers have been telling pollsters that they have resolved to cut back on their spending, as they have attempted to navigate the stormy waters of the worst economic downturn in decades.

 

A recent Gallup poll says that 89 percent of all Americans are watching their spending. Consumers’ mantra has been constant: “No more conspicuous consumption for us.”

 

Americans’ new resolution calls for embracing the thrifty habits of their forbearers who lived through the Great Depression.

 

But as any dieter will tell you, when offered a comfort food like chocolate, their best intentions – and firmest resolutions – are tossed to the wind.

 

Shoppers are no different from dieters: when offered a “great deal” on retail goods, they are likely to jump at the chance to make a purchase. Later, they rationalize that purchase by insisting that they saved lots of money by acquiring the items at a low “sale price.”

 

Early indicators from the 2010 holiday selling season suggest that jewelers, along with most other retail merchants, experienced strong demand for their wares. Customer traffic was up, and there was a sizable increase in sales transactions, even though the average ticket remains below past levels.  

 

Shoppers have apparently finally caved to “frugality fatigue” which caused them to loosen their purse strings, despite their best resolve. “Frugality fatigue” is more than just pent-up demand; it describes consumers who are indulging in a “spending fix.” They have grown tired of the painfully slow pace of the economic recovery. They are tired of staying away from malls, and they miss the social “rush” that shopping crowds generate.

 

Based on the latest shopping trends, it appears that American consumers are poised to return, more or less, to their pre-recession shopping habits, now that the economy and stock market are on the mend. While there are still some potholes on the road to recovery – real estate values and unemployment levels remain disappointing – eternally optimistic American consumers are looking for brighter times ahead, and they are back in the shopping malls.

 

Old Habits Die Hard

Americans are hard-wired to buy stuff. Entire generations of Americans consumers have grown up with the concept of instant gratification, fueled by easy credit. Want to buy a new car? New furniture? A second home? Done. Instantly. Only in America.

 

Psychologists tell us that people change very slowly, if at all, especially when it comes to behavior as a consumer. More often than not, shoppers revert to their long term routines, when given the chance.

 

For example, in the months immediately following the horrific events of 9/11, Americans swore off their free-wheeling irrationally exuberant habits, vowing to embrace a more conservative lifestyle. That attitude lasted about six months, based on retail sales trends. By early 2002, shoppers were back in the stores, and spending resumed its pre-event crescendo.

 

Despite a decline of 70 percent in jewelry sales during the Great Depression, demand for jewelry never completely dried up. And, when the recovery finally came – driven largely by economic growth related to World War II – jewelry demand rebounded and resumed its historical growth pace.

 

Research and current spending trends seem to confirm that the so-called Great Recession of 2008-2009 will not derail American shoppers’ cultural affinity for jewelry.

 

Why Do Americans Buy Stuff?

Americans save less, spend more, and rack up more debt than most Europeans or Asians. Is this cultural, or are there other factors to consider?

 

There are two key reasons why American consumers have earned the moniker “born to shop:”

 

·        They buy stuff because they can.

·        They buy stuff because the tax system encourages consumption and the associated debt accumulation while discouraging savings and investment.

 

American Shoppers Buy Stuff Because They Can

In America’s free market society, a vast array of goods are available – more goods than in almost any other nation in the world. The alternatives are endless: any color, size or quality of merchandise is available for a reasonable price. Retailers’ promotions appeal to shoppers’ sense of value: goods are discounted frequently, and deals abound.

 

Americans’ per capita income levels are among the highest in the world, so shoppers can afford to purchase just about anything they want.

 

Studies suggest that at least 40 percent of all consumer spending is discretionary. If we measure consumer expenditures based on Maslow’s Hierarchy of Needs, only 51 percent of all American household spending is on their basic needs of food, clothing and shelter.

 

Because Americans have so much money available, they buy goods as a way to express themselves, display their identities and create a public persona. These are also the key drivers of branded goods: consumers want to be identified by the brands they purchase.

 

Shopping in America goes far beyond simply buying things because consumers need them. Americans invented recreational shopping. Behaviorists say that consumers use shopping as therapy, reward, bribery, pastime, as an excuse to get out of the house, as a way to troll for potential loved ones, as entertainment, as a form of education, and as a way to kill time.

 

Because American shoppers have ample discretionary spending budgets, they often make impulse purchases – “I must have this right now.” Malls are designed to stimulate unplanned purchases and to promote impulse buying.

 

Finally, Americans are taught that spending money means more jobs. And more jobs means a growing economy. So it is patriotic to spend money.

 

America’s Tax System Encourages Consumption & Debt Accumulation

Spending, saving, and credit levels are all about incentives, suggest some economists. If there is an incentive to save, consumers will save. If, on the other hand, there is an incentive to spend and take on debt, consumers will spend for big ticket items that require many months of payments. When easy credit is available, it is usually taken.

 

America’s tax code has massively promoted consumption and debt through incentives, while punishing savings and investment.

 

For most nations around the world, a consumption tax – the VAT tax, as it is popularly known – is the largest source of tax revenues. Consumption is heavily taxed.

 

In the US, there is no VAT. The closest thing that America has to VAT is a local sales tax – typically 5 percent or so – and imposed by the locality, with no funds flowing to the federal government. The rate of America’s sales tax is far below the typical VAT which can be 15-to-20 percent or more. 

 

Further, VAT is added to the cost of the merchandise, and the price tag on the goods includes VAT. This makes goods seem more expensive than the underlying asset value would suggest.

 

In contrast, the sales tax is not included on the retail price tag in America, but is added at the cash register when the goods are purchased. Thus, goods seem to cost less in America because the price tag does not include any taxes. This system makes goods seem less expensive than they really are, and it encourages consumption.

 

America provides incentives for spending income. For example, the home mortgage interest tax deduction, which has been eliminated in most other countries, rewards Americans for accumulating huge debt related to their homes. A large portion of the monthly payments related to a home mortgage is deductible against consumers’ incomes. That’s why many Americans own more than one home – because the tax system encourages it.

 

Automobiles can be leased, and, in some cases, those lease payments qualify as an expense which can be deducted from income. Thus, there is an incentive to spend money on a new automobile.

 

Further, there is no incentive to generate additional income. Not only are miscellaneous sources of income taxed, but the extra income can push a taxpayer’s marginal tax rate higher.

 

The interest income on savings accounts as well as stock dividends and profits on trading of stocks and bonds are taxed. Thus, there is no real incentive to save money or invest in growing companies that will produce a profit and stimulate economic growth.

 

Cash dividends are double-taxed: the corporation pays those dividends with after-tax dollars, and the recipients of those dividends pay another tax when the dividends are received. Thus, investing in dividend-paying companies is discouraged by the tax system.

 

Home-equity loans have been far too easy to obtain, and are based largely on the value of the underlying property rather than the borrower’s ability to repay the loan. The U.S. tax code allows consumers to write off the interest costs related to home equity loans; this encourages additional borrowing. The prevailing attitude among consumers is “let the government ‘pay’ a part of the interest cost by allowing me to take a tax deduction.” If consumers don’t borrow, their personal income taxes will be higher.

 

Bottom Line: Americans Are Born to Spend

We’ve said it many times: spending habits change by evolution, not revolution. Despite major setbacks, American shoppers have a love affair with their malls – and with their jewelry. Baseball may be America’s national pastime, but shopping is its passion.