A couple of years ago it might not have seemed possible, but it's finally happened: Americans have remembered how to save. We've trimmed our grocery bills, cut back on the non-essentials, and generally embraced the economical side of life. But although saving money can be good for the family or individual, experts are starting to question its effect on the economy as a whole. The question is simple: If nobody wants to
spend money, how is anyone going to
make money?
The
Los Angeles Times recently published an excellent
article exploring why consumers are reluctant to start spending again and how it might impact the economy. In the broad scope, the economy has already begun to bounce back, with increasing stock values, decreasing layoffs, and a more stable housing market; and in recessions past, seeing the light at the end of the tunnel corresponded with a rise in consumer spending. This time, though, Americans seem particularly reluctant to reopen their wallets—a reaction to staggering personal debts and job-related insecurities. (Check out the original
article for the scary particulars.)
The
Times cited a survey conducted late August by American Express, which reminded me of
Cara's money-finding post. AmEx asked 2000 people what they would do if they found $500, offering choices like going on vacation, dining out, or indulging in a shopping spree, as well as some more financially conscious options: paying the bills, alleviating credit card debt, or simply saving the cash. Of those 2000 people, only 10 percent selected any of the money-spending options.
I have to admit, I was in a bit of a panic by the time I finished this article. If consumers continue to save as they are now, we're in for another rough Christmas, and that's only going to hurt the economy more. That being said, if the economy stinks, how can we be expected to set aside cash for stocking stuffers?
As always, in my time of need, I turned to the one place I can always go for answers: Wikipedia. Here, I learned that the problem I'm describing is formally known as the
paradox of thrift, a notion attributed to the 21st-century economist John Maynard Keynes; the paradox states that saving, while good for the individual, is detrimental to the economy as a whole. But—and here's where I started to feel better—critics of Keynes' paradox list the following concerns:
- A decrease in spending should lower prices, thus increasing consumer demand (though profit margins will be slimmer).
- When people save money, they rarely stick it under the mattress. Saved money can be loaned or invested so as to stimulate the economy.
- The paradox relies on a closed economy, but even if we're saving, consumers in other countries might not be, and they can buy our stuff.
That's a lot of food for thought, but it still leaves me uncertain about whether I should feel responsible for the effect my spending and saving habits have on the economy. I guess the moral of the story is this: It's a good thing Americans remembered how to save, but I hope we haven't forgotten how to spend.
How has the recession affected how much you spend/save? Do you ever feel guilty for saving too much?
Comments (8)
Definitely!!! Everything I make, I use to pay off my credit cards and loans. And it doesn't count as spending since it's paying off old debt.
But I justify a few purchases as "stimulation for the economy."
Great post!!!
I save. Don't have any debts yet but probably will be in some soon once I go into graduate school.
@tigerdauphin@xanga - Thanks :)
Yeah, it's kind of a win-win. I can feel good about myself for saving, but then when I do splurge I can say I'm doing it "for the economy"
I want to buy a house so I have no option but to save as much as possible. If I do splurge it's always "for the economy"
Since I became aware of how bad the economy was, thats when i really started saving and paying off debts. Now that ive been accustomed to saving so much it kinda feels good when i see that i have a decent amount saved up in my account.
u really think that we are all rich and have $$ to spend ?
I think too many people with huge incomes and gigantic savings accounts is bad for the economy. The most important factor in dollar value is the dollars per capita in circulation. That's another reason people should negotiate a salary that supports reasonable comfort and ability to do their job well; but not such that the employer has to gouge the wallets of customers to pay them.
If your savings can't support you for the rest of your life, put as much in there as you can live without for now, invest in bonds, etc. Unless you have a separate retirement account. If you have more than you can spend, give it to charity or fund something else you believe is beneficial to society.
It's just better to keep as much as we can in circulation, so the U.S. Treasury doesn't have to print so much. And, of course, it also helps keep people working. :)
I don't think Americans have "remembered" how to save as much as they have been "forced" to. The era of easy credit from banks has come to a nasty end and with the major downturn in housing, Americans can no longer rely on their homes as piggy banks.
The problem is really Americans have been spending money they shouldn't have for years via over extended credit and now we are experiencing the hangover effects full on.
I thoroughly challenge the notion that the economy has started to bounce back as far as the average American is concerned. Decreasing layoffs is not the same as increased hiring. The media can write tons of articles about how the economy is turning around, but if those laid off remain unemployed, they are still experiencing 100% recession. We are at unemployment levels not seen since the Great Depression, and is getting worse since companies are still letting folks go.
People won't spend if they think their jobs are in jeopardy. This forced thrift may be painful in the short term, but it's better for the economy overall in the long term as people learn to live within their means.
I have some comments on what some of the articles positive statements:
"A decrease in spending should lower prices, thus increasing consumer demand (though profit margins will be slimmer)." - Lower demand will be here as long as unemployment remains high. Companies will lay off more folks to save money to lower prices, but demand will continue to shrink with increasing unemployment. This is known as the "death spiral".
"When people save money, they rarely stick it under the mattress. Saved
money can be loaned or invested so as to stimulate the economy." - People aren't saving money per say, but rather using it to pay off their debt. Investing isn't on the majority of folks minds right now after the market crash.
"The paradox relies on a closed economy, but even if we're saving,
consumers in other countries might not be, and they can buy our stuff." - The recession is worldwide. As an example, Iceland is bankrupt. Next, thanks to little regulation and excessive greed in corporations, more and more of our manufacturing jobs have been shipped overseas, so we don't make that much stuff anymore. The flip side to that is that we are a major consumer to many countries, so when we stop buying, the world suffers as well.