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America grapples with 'paradox of thrift'
By Martin Crutsinger |
February 19, 2009, Thursday
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Print Edition
Print Edition
WE may be witnessing a long-term behavioral shift as Americans come to grips with an unsustainable lifestyle and credit-financed shopping spree. They're starting to save, reports Martin Crutsinger.
Americans are hunkering down and saving more. For a recession-battered economy, it couldn't be happening at a worse time.
Economists call it the "paradox of thrift." What's good for individuals - spending less, saving more - is bad for the economy when everyone does it. The government recently reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.
The Commerce Department reported consumer spending fell for a record sixth straight month in December, dropping 1 percent amid worries about surging layoffs. That was slightly worse than the 0.9 percent decline economists expected.
Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.
The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.
Grace Case, 38, of Syracuse, New York, is a self-described recovering creditaholic. For 13 years, she charged it all - cars, clothes, repairs, vacations. She'd make only the minimum card payments to sustain her buying spree for her and her family, which includes her husband and two children.
But after being laid off two and a half years ago from her job as an accountant, she landed another accounting job that cut her salary from US$60,000 to US$40,000. It was impossible to meet minimum payments on her card balances.
Now, the Cases are on a strict budget. They take "staycations," grow their own vegetables, buy only used cars and pre-pay cell phones. Case hasn't used a credit card in two years. And she's saving more.
"It's really a liberating feeling," she says. "If you want something, you have to have the money for it."
Many economists think the savings rate will keep rising, perhaps as high as 6 percent or more.
So where's the money going? To savings accounts? To debt reduction?
No one knows for sure. But Robert Frank, Cornell University economist, says it doesn't much matter.
"For economic purposes, paying off debt and saving are the same," he says. "Incurring debt is negative savings; paying down debt is savings."
He sees a long-term behavioral shift. He calls the spending of the past decade or more unsustainable.
Americans are hunkering down and saving more. For a recession-battered economy, it couldn't be happening at a worse time.
Economists call it the "paradox of thrift." What's good for individuals - spending less, saving more - is bad for the economy when everyone does it. The government recently reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.
The Commerce Department reported consumer spending fell for a record sixth straight month in December, dropping 1 percent amid worries about surging layoffs. That was slightly worse than the 0.9 percent decline economists expected.
Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.
The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.
Grace Case, 38, of Syracuse, New York, is a self-described recovering creditaholic. For 13 years, she charged it all - cars, clothes, repairs, vacations. She'd make only the minimum card payments to sustain her buying spree for her and her family, which includes her husband and two children.
But after being laid off two and a half years ago from her job as an accountant, she landed another accounting job that cut her salary from US$60,000 to US$40,000. It was impossible to meet minimum payments on her card balances.
Now, the Cases are on a strict budget. They take "staycations," grow their own vegetables, buy only used cars and pre-pay cell phones. Case hasn't used a credit card in two years. And she's saving more.
"It's really a liberating feeling," she says. "If you want something, you have to have the money for it."
Many economists think the savings rate will keep rising, perhaps as high as 6 percent or more.
So where's the money going? To savings accounts? To debt reduction?
No one knows for sure. But Robert Frank, Cornell University economist, says it doesn't much matter.
"For economic purposes, paying off debt and saving are the same," he says. "Incurring debt is negative savings; paying down debt is savings."
He sees a long-term behavioral shift. He calls the spending of the past decade or more unsustainable.
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