A champion of savings over spending
We're subjected to constant barrage of unhelpful advice to the effect that what the economy needs is more spending. (The stimulus program is one piece of this.) It's kind of understandable: A recession is all about the downward spiral of people buying less, forcing businesses to shrink, putting people out of work, so that they spend even less. The cure, though, is not just a bunch of extra spending. The cure is to get the economy to the right size.
The right size, of course, is the size where the spending for consumption leaves a surplus that exactly matches the economy's need for investment. For decades it has been the wrong size in one direction--Americans have been spending at unsustainably high levels, saving too little to make the necessary investment in future production. The recession has caused spending to plummet, meaning that current levels of spending may well be below the long-term "right size" for the economy--the current stimulus program is an effort to get spending back up. Personally, I'm not hopeful.
For one thing, that "right size" is impossible to know. Economists try to estimate the right size by looking at shifts in the demand for money, changes in interest rates, and so on. Those sort of analyses can be useful as steps toward understanding the economy, but it's hopeless for coming up with the right answer. That's why a market economy is so much more productive than a planned economy: The analysis is simply impossible--data isn't timely or complete enough, production technology and consumer preferences are constantly changing, and planners aren't smart enough even to know all the things they ought to be planning, let alone how they all interrelate in the real world.
Fortunately, this is the area where markets work really well, if you let them. Let investors allocate resources, let consumers decide what to buy; you'll get very close to optimal resource allocations. You'll also, in the long run, get close to optimal saving and investment. Sadly, as we've seen recently, in the medium run you can get really bad levels of saving and investment.
There are a lot of bad solutions for this. In particular, having the government decide what investment is worth making is a bad solution--although maybe not as bad as what we've seen over the past 25 years or so. A much better solution is educating people to make smarter decisions. One group that's trying to do that is Choose to Save.
I just learned about Choose to Save in a segment on last night's NewsHour on PBS. They showed clips from some hilarious public service announcements with Savingsman, a comic book hero out to rescue people from bad financial decisions. The PSA spots are available on their website, along with brochures, calculators, tips, and so on.
The NewsHour segment has a great interview with Dallas Salsbury, the founder of Choose to Save. One of the main themes of the interview was about whether it's really appropriate to chose saving over spending right now, with the economy in the shape it's in.
Fortunately, Salsbury is a great advocate for saving as a necessary step in restoring individual balance sheets to sound levels. He had some stuff to say that most people will probably find pretty tough to hear: That we probably need to spend the next decade or more deleveraging--paying off debts, building up savings, and making investments. That's how we can build the foundation to once again find some prosperity. The interview is well worth listening to.
The current stimulus program is an attempt to pull up the dip in spending between now and when individual balance sheets are at sustainable levels--to keep things from getting as bad as they might until we're back on a sound basis. The problem is the vast gulf between here and there. Unless something amazing happen with income levels, we're at least a decade away from having things cleaned up enough that we can start thinking about finding a new normal. As I've written before, debt levels are just too high.
So, don't worry that being frugal will hurt the economy. In the long run, the best thing people can do for the economy is to get their own debt levels down and saving levels up to where their personal financial situation is secure. Until then, choosing saving over spending is the right choice.
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