Thrift Paradox – Is Frugality Hurting Economy?
| January 12, 2009 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
Frugality is on the rise.
For the first time since 1952, U.S. household debt declined (3rd quarter 2008) according to the Federal Reserve. Unsurprisingly, U.S. consumer spending growth also declined for the first time in 17 years.
Image Credit: crizlai
Additionally, U.S. consumers are beginning to save. Economists now expect the 2009 savings rate to rebound to 3% to 5%, or even higher. This would be amongst the sharpest reversals since World War II. In fact, Goldman Sachs predicted the 2009 saving rate could be as high as 6% to 10%.
Many “families hope their new found frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end” (Kelly Evans WSJ).
Is frugality BAD for the economy?
Frugality is generally thought of as good for individuals, families, and the economy. Frugality allows families to accurately assess what they can currently afford and avoid or at least delay purchases that are beyond their means. Frugality also allows families to put aside money for investments and for purchases, which both help fuel economic growth. Although it is unfortunate that it took a down economy to MOTIVATE some of us to be wise with our money, ultimately fiscal responsibility is a good thing.
Nonetheless, everyone becoming frugal simultaneously in an economy largely based on supplying their excesses (expensive cars, McMansions, Jimmy Choo’s, jewelery, 60 inch plasma TVs, fine dining, etc) can hurt businesses. Some even blame frugality for exacerbating the recession, but ultimately frugality is merely the natural response to increased awareness of our fragile economic states.
Frugality is NOT the problem.
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. For example, homes in some real estate markets are just beyond the financial reach of typical consumers, yet through aggressive marketing, ignorance, and “sophisticated” business models, buyers were still financed. Although this worked in the short-term, all parties lost once the bubble popped.
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. Still, some suggest…
“Americans, fresh off a decades-long buying spree, are finally saving more and spending less — just as the economy needs their dollars the most” (Kelly Evans WSJ).
There is almost an implicit criticism of consumers, in the tone of such statements, for being unwilling to waste money on discretionary purchases. Such statements are also unbalanced because there is not even an acknowledgement that many businesses are aggressively deleveraging (dumping debt and removing financial risk) as well.
Time like this are where innovation must abound. 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.
Hopefully, consumers will continue to be frugal. Financially-conscious consumers will have money in the long-term, and that’s when the real spending, giving, and investing can begin.
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Thank you for this post! As someone who is lucky enough to still have a great-paying job but is trying to save money and be responsible, I get the feeling from the media that somehow the continuing downward spiral is all my fault for not buying an expensive new car or house!
JD,You're completely right. I think responsible people are getting tired of the media dumping the problem on us, as if we are suffering the consequences of our actions. We didn't create this crisis! Sure there are plenty of people to blame (irresponsible borrowers, greedy businesses and financial institutions, dishonest or ill-informed real estate lenders, etc.), but for those who have been doing the right thing all along, laying the blame on us is down right insulting.
If your business model is failing it's time to start looking for a new one instead of blaming your customers for not spending enough money. : /
I don't think frugality is hurting our economy. In fact, frugality is the need of the hour to survive the crisis.
This is a well needed posts, I'm tired of biz people telling me I'm going to save money if I buy their junk… I don't need it or want it. I want biz people to think smart and help me so then I will want to help them… kinda like Hyundai
Thanks for the support, and I can't agree more. So many people are looking to point fingers that the blame game is getting ridiculous. People are still buying (Walmart and Mcdonald's recent increased profits prove this). It's not our fault if they know how to drive sales and other businesses cannot compete. That's just how the game goes.
Frugality is hurting the economy because 2/3 of the US economy is based in consumer spending. Any economist will agree that before the problem was in the financial markets, but now the problem is consumer spending. That is a much more serious problem. If people are being frugal, they aren't spending and 2/3 of the economy is suffering. People are arguing that saving is good for the individual person, but if they aren't spending money, that 2/3 of the economy isn't doing well and now that individual is at risk for losing their job. Saving is good, but if there is too much saving businesses won't be able to sustain themselves because nobody is buying their products and people will lose their jobs. Hence Microsoft's first layoff in history.
Ironically, it's not frugality that got us here, it's the chronic overspending and 'I want it now' mentality
VC – I guess I should state my bias: frugality is one of the best ways to build wealth individually. Thus, I believe long-term frugality is GOOD for the economy because long-term wealthy people can buy more stuff and invest. It is the major premise behind Millionaire Next Door and The Millionaire Barber, two books that I agree with fundamentally. Now, I am aware that consumer spending makes up 70% of the GDP; I am arguing that that GDP has been recently inflated with spending based off of borrowed money for too long. In other words, people were spending way more than they had (the debt to income ratio was 17:1 according to Smart Money Magazine 2007). I think it is only natural to cutback once you realize how at risk you are. This "forced frugality" is not the problem but the response to the problem. The problem is business models that were based on people spending borrowed money to finance luxuries they couldn't afford.TStump – Thanks for this insight. I guess this adds debt to the issue. Frugality didn't get us here and it is not the problem either!Thanks for the comments.
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thanks for clarifying that. i often hear that not spending is hurting the economy.
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