In recent weeks, I’ve had the same or nearly the same conversation with conservative friends. They assert that the problem with the economy is being made worse by the media reporting on problems in the economy and then go on to assert that things would be fine if only we believed things were fine. This conservation reminds me of a previous conservative talking point (the media should report the good news out of Iraq then more people would support the war). It’s a curious notion really that the problem would go away if we didn’t talk about it. I don’t buy the argument for one very simple reason – the economic downturn is real, has real causes and not talking about those things won’t make them go away. The claim that the media is making things worse is not so much analysis of the situation as it is wishful thinking.
But, it’s also not entirely insane.
Follow me here. The economy is created by people and our choices. We influence one another in our choices all the time. At any given time, we expect some people to be facing hard times economically. If we perceive that it is not some people but many people, we begin to fear we could be next. So we begin saving rather than spending.
The paradox of thrift states simply that at an individual (micro) level, thrift is good. But if too many people are too thrifty at the same time, it causes problems at the macro level – hence the paradox.
American consumers have been on spending spree for over a decade, much of it fueled by debt. A little debt is not a bad thing. A lot of debt can be. American consumers have maxed out our credit cards, borrowed on our home equity, taken out loans against our 401ks and so on and now we can’t borrow any more. So suddenly, for the first time in decades, our savings rate is increasing, which is a good thing in some ways but is also problematic in a demand driven economy at a time that demand is drying up – as Krugman puts it, we’re returning to Depression Economics when consumer demand is simply insufficient, when the economy is too uncertain and consumers as a result are very cautious.
Now the good side of these changes are obvious – increasing thrift, more debt-averse consumers, better individual financial management leads to a healthier and more sustainable economy. Consumers and households not drowning in debt are a good thing ultimately. Both long and short term savings are good things. At an individual level, these changes are expressed in more people packing their lunches instead of eating out, in people saving first and then spending, in people realizing that we don’t need new cars every other year and we don’t need a whole new wardrobe every fall and so on.
Which has me thinking about my grandmother. She and my grandfather married in 1932 – not exactly a banner year for starting a new life. For the first few years of their marriage, my grandfather could not get regular work. He might work steadily for a month then not steadily for two months or whatever. Grandma, however, did find and keep regular work – at first as a butter packer the Deseret Creamery. She was a shrewd and thrifty woman and even back then she saved every single month. Even if it was just fifty cents, she put something aside. She and grandpa rented until the could afford the downpayment on a house, which was in 1942. I remember her telling me about her house and how she drew the floor plans and she knew what she wanted. And they lived in that house for a long time – they paid if off and stayed put. They could have moved to a bigger house in a nicer neighborhood but they choose to stay put. My grandmother lived in the same house for fifty years. When they needed to borrow they did – to buy a car. But if they couldn’t pay cash for something, they went without until they could. And every month, every single month, grandma saved some money. My grandparents didn’t often go without – if they needed something they bought it, but they treated luxuries as optional. In their retired years, they traveled a great deal and enjoyed their lives.
Such a model of personal finance – of planning, of thrift, of wise consumerism, of achieving financial stability through good planning – is a wise one. As a consumer, as someone raised in a consumer society, I look at such values and they seem a little old fashioned but at the same time, they seem surprisingly wise.
In recent weeks, I’ve found myself emulating those choices. Increasing my saving, delaying unnecessary purchases, planning my trips to the store. And I find myself wondering if – when this economic dislocation is over – will we emerge as a nation wiser and smarter about money or will we learn the opposite lesson – that we can gamble bit, we can double down on any bet, and somehow bail ourselves out when the waters rise?