A Note to American Addicts: Buy Smart....But Keep Buying

According to Nobel-Prize winning economist Paul Krugman, the biggest threat to a recovery for the global economy at the moment is a fear-based downturn in spending. I know it seems counter-intuitive. When times are tough, it feels right to save everything, squirrel that cash away and wait out the storm. The problem is, though, if everyone does that together, the impact on everyone is even worse than if people simply modify their spending to a more reasonable pace. Here's how Krugman put it:

[O]ne of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.

At this point, however, the instructor hastens to explain that virtue isn’t really vice: in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can’t offset the fall in consumer spending.

I’ll bet you can guess what’s coming next.

For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.

Krugman goes on to explain that policy is the only thing that can truly save the economy at this point. The best minds I've read seem to feel the best policy would be a significant Federal investment in infrastructure (you'd think that collapsing bridges would be all anyone needs to see the wisdom of some investment). This would create jobs (giving more consumers money to spend) doing work that clearly needs to be done. Moreover, we'd be keeping the nation's framework strong so that when things eventually turn around we're ready to roll again.

It won't shock anyone that I see a strong parallel between that advice and what I think the art world's response to the current situation should be. Word out of Paris and Berlin is that sales were surpisingly strong at both fairs. After the disappointing auction and fair results in London, that is a relief. But the word is also that there were far fewer Americans buying. The ones who are still buying fall into that category of collectors that we lovingly call "addicts." Supercollector Mera Rubell put it as well as anyone I've read recently:

The financial world has been turned upside down, but we’re still addicted to art. We’re not going to start looking for the best stocks; we’re going to continue to do what we’ve done for the past forty-five years: look for the best artists.

Continuing to buy work by the best artists will, like upgrading our bridges and highways, be a wise investment despite how long the downturn lasts. Feeding one's addiction now is unquestionably going to be easier than it will when the market heats up again. As Krugman says, if everyone stops buying, it can leave everyone worse off. Don't let the Europeans get the upper hand and all the best pieces, you American Addicts...buy smart, but keep buying.