For those of you who know me well you understand how notoriously slow my decision making is; that’s what you get when you take economics theory literally. In any case as I ponder today I believe my decisions are correct in most cases. For one I rarely suffer from buyer’s remorse–I suppose someone who actually calculates price per ounce during the purchase of potato chips is incapable of that. At this moment I am clearly smoothing my consumption–taking a huge debt that is. Given how easy it is to sell things on Ebay and Craig’s List one could argue that borrowing, try and sell if unsatisfied is a dominate strategy. Not that this is easy to do–a lot of self control is needed for the “sell” part to work. That said, the $5000 credit card debt an average American takes on is not consumption smoothing; for them there is no foreseeable huge raise in income. I would even say the right thing for them to do should be saving.

Consumption smoothing is not as easy as it sounds; one really have to be thinking in terms of “the very long run” for this to work. And the real difficulty lies not in how much to spend but how to spend. Last but not the least credit constraint is very, very real.