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Economists Blame ME for the Slow Recovery
| August 6, 2010 | Posted by Roshawn Watson under Uncategorized |
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| crizlai |
By: Roshawn Watson
You are responsible with your money. You plan your purchases to be within your family’s means. You don’t deprive yourself of fun nor manipulate others to obtain good deals. You are simply looking for value. This is my strategy along with millions of other Americans. It is a solid path towards prosperity and will contribute to overall economic growth, but that doesn’t get the press. Instead of admiration (or even understanding), these efforts garner contempt as the frugal once again get the blame for dismal economic activity.
Economic recovery falls to thrifty consumers
In his article entitled Economic Recovery Falls to Thrifty Consumers, Martin Crutsinger recently wrote:
“For the economic recovery to gain strength — and the unemployment rate to come down in any meaningful way — consumers will need to become less frugal.”
This statement caused me to ponder whether we even understand frugality.
Frugality concerns itself with value not cheapness. Thus, in some cases, your purchases may technically be more expensive than someone else shopping for the same types of products. The difference is that you have done due diligence and know that you are not being wasteful with your money. You are focused on obtaining quality for your dollars. In the Thrift Paradox – Is Frugality Hurting Economy?, I argue that “frugality…allows families to put aside money for investments and for purchases, which both help fuel economic growth.” In no way does frugality halt spending. To be clear, frugality is not our culprit for a dismal economy.
Moreover, families have recently increased purchases on several items including: cars, electronics, and consumer staples like razors and shampoo. General Motors, Chrysler, and Procter and Gamble have all increased revenues recently. These gains were achieved by catering to more savvy shoppers. General Motors and Chrysler posted higher U.S. sales in July through summer promotions and easier credit plans. P and G also cut its prices, offered discounts and created lower-priced versions of some brands to hold onto customers. Interestingly, Crutsinger failed to discuss our increased spending on technology perhaps because it doesn’t support his point.
Regardless, our spending is up, even for big ticket items like cars, but that’s not good enough. Economists want consumers to become more wasteful by increasing our spending on items with lesser value just so retailers can increase their profit margins all in the name of patriotism. That’s just ignorant unwise. Pardon the expression, but what are they smoking?
Fix Your Business Model Instead Of Criticizing Mine
It’s the retailers’ economic models that are broken not mine. The real problem is that some businesses and financial institutions want to continue to fund economic growth on the backs of ill-informed and overstretched consumers. It is a bit naive to believe that consumers will indefinitely be able or willing to fund the economic prosperity by staying ridiculously financially over-extended long-term.
It is beholden to businesses that want to survive in this climate to innovate instead of trying to coerce consumers into wasting money on purchases that are out of their means. As I mentioned, businesses aggressively deleveraged (dumped debt and removed financial risk) all in the name of remaining financially viable, but consumers are criticized for the same behavior. That is totally unbalanced.
The aforementioned companies achieved higher revenues through adaptation to consumer purchasing preferences. Sure, it can be rough chasing those consumer dollars, but fixing the business models so that they are not so dependent on consumers spending money that they don’t have for products and purchases they don’t need is key for long-term economic growth.
We Are Not That Thrifty Anyway
Lastly, it is completely disputable that we are frugal anyway.
During the first quarter of this year, the US savings rate had a steep decline to 3.1% from last year’s 12-year high of 5.4% during the same quarter. If our annualized savings now stands at 6.4 percent, as Crutsinger suggests, the change is to be lauded not criticized. We still have a way to go.
Additionally, in The Real Reason Why that Debt is Decreasing, I wrote about a surprisingly sad analysis performed by the WSJ on our decreasing debt burden. The average household debt to income decreased from a staggering 131 to 122% in May. Thus, on the surface, it appeared as if frugality and austerity had finally repenetrated our societal fabric. However, what the insightful analysis ultimately revealed was that debt to income ratios were decreasing because debts were going into defaults. Instead of paying down our debts, we elected to default. In fact, the defaulters accounted for the whole decline, while the rest of consumers had actually been building up more debt straight through the worst financial crisis and recession in decades.
Some may counter saying that debt increased because families had less money due to high unemployment. In some cases, that is true. However, this explanation ignores the fact that overall spending has also increased. The GDP still increased. Apple just reported its highest quarterly revenue ever as net income jumps 78%. Don’t tell me that consumers are unwilling to make discretionary purchases if you come up with a good value and a clever marketing strategy.
In aggregate, we have increased debt, increased our spending, and decreased our savings rate.That’s a far cry from the generational imprinting of frugality so many pundits claim the recession to have induced. The point is that innovative and adaptive companies can still get consumers to spend big bucks. Don’t blame frugality for faulty business models. Frugality is the cure not the problem.
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It all stems from a faulty understanding of economics. If people want to stop spending so much money on frivolous goods, then it's up to the economy to adjust. Politicians should stop trying to manipulate things and stop poking around in the economy so much, as they are doing more harm than good.
Of course, it also stems from the voters. If voters hadn't pressured government to give them such easy access to homes in the form of lower interest rates, subprime loans, etc… perhaps less resources would have been wasted!
Frugality is a good thing. It means people are being more efficient with their income. Again, up to the economy to adjust to this new reality instead of trying to return to the old way of things. If you really want people to consume more, then stop discouraging savings which fund real investment, which will lead to more true prosperity and consumption down the road.
Great article. We (the frugal) didn't create an economy built on unsustainable growth, why should we support it? So much flawed logic and consumer mania out there. Happily, I don't get out much 🙂
Frugality is the cure- not just at the individual level, but at the national level as well.
There has been much talk about deflation of late. Increased consumer spending doesn't happen in vaccum, ignoring the relatively high unemployment rates and declining asset values. It's quite simplistic, IMO, for folks to blame the consumer for much of anything.
I like the statement: Fix your business model… Very insightful. I couldn't agree more, I abhor equating success, beauty, etc. with consumption. Of course, I like capitalism, just not conspicuous consumption nor obessive consuming.
Roshawn,
The problem is that 70% of our GDP is now based on consumer spending. In the past, a much higher percentage was based on manufacturing and other production industries.
In order to circulate money through our economy, we each have to spend a certain amount. If everyone hoarded all of their income, the economy would stagnate. In my opinion, we should all save and invest a certain amount as well. Investment is just as critical for our economy to blossom.
Banks and industries are taking care of themselves at our expense. One shameful example is Harley Davidson (HOGS) who made record profits in the second quarter, by laying off a third of their workforce. Now, they are threatening to leave Milwaukee and lay off the rest of the workkers. Yet, they are complaining about slowing demand fo their bikes. I couldn't make this stuff up. Unbridled greed is an ugly thing.
Isn't the goal to accumulate wealth, not debt? To sacrifice today for a better future tomorrow? To buy assets that appreciate rather than depreciate?
My recent post Pet Peeves- Golden Parachutes
Unfortunately Keynes gets a lot of blame in this. He provided a solution for the Great Depression when in fact consumers were afraid to consume and businesses were afraid to hire. Hence he recommended that government run deficits and consumers bring us out of the depression. Sixty years later we had an economy with a negative savings rate, spurred on by excessive debt creation relying on the savings of the rest of the world. As a result we came to the brink of going over the edge in 2008.
You are exactly right Shawn in that frugality is not to blame. We need to take a harder look at our economics and what is causing this. Spending beyond our means is not the way to create wealth. Fortunately there is a school of economics that can point the way called the Austrian School led by von Mises.