The Paradox of Thrift
By Don Kuehn
Not long ago, commentators were lamenting the profligate spending and low savings rates in the United States. In the third quarter of 2005 savings actually hit an all-time low of negative 0.5 percent. Consumers were dipping into savings or, more likely, taking on substantial debt to finance their lifestyles. In most cases, that was fueled by a rising stock market and consumers' belief that the value of their houses was going to continue to go up and up and up.
More recently, in the fourth quarter of 2008 savings hit a level not seen since 2001: a positive rate of almost 3 percent. Why the turnaround? There's fear in the air.
Just about every indicator in the economy has gone south. The housing bubble has burst after a run of scandalous lending practices; jobs have been cut in almost every sector of the economy; the "over-stored" situation in many parts of the country—where new strip malls and shopping hubs have popped up seemingly overnight—has peaked and begun to ebb; retirement accounts have lost a decade of growth; friends, family members and neighbors have seen their hours cut back or their jobs eliminated. It's not a pretty sight.
Out of fear, and in anticipation that it could continue to get worse, Americans are gradually trimming debt levels, paying off credit balances and hoping that the recession will somehow slip right by.
But "saving for a rainy day" can actually bring on more rain. That's part of the paradox of thrift: Saving is good unless we all save too much.
Keep in mind that consumer spending accounts for about 70 percent of the U.S. economy. As savings increase, less money is spent on consumer goods and services. Demand shrinks. That puts pressure on manufacturers and retailers to lower their prices in an effort to get people to spend.
As an example, consider the Christmas holiday season in the retail sector. By early October, it seems as if every store already is advertising Christmas merchandise. A few early shoppers aside, when goods don't fly off the shelves, the pre-holiday sales start. We all know they're coming, so why buy at full retail? Why not wait? The closer to the big holiday, the deeper the mark-downs as retailers try to entice shoppers into their stores. But as tempting as those low prices and deep discounts might be, the savvy shopper knows that the biggest sales are the days after Christmas ... so why buy early, even when the sales seem too good to be true?
As shoppers "stay away in droves," the retail sector (which depends on holiday revenues for as much as 60 percent of its annual profits) sweats out the season. Gift cards have become the alternative of choice for those who want to give a gift, but want to get the most for their dollars. Instead of getting Uncle Fred that new golf shirt or Aunt Mary that new skillet, you give gift cards so they can buy what they want at even deeper discounts after the New Year. That takes a serious toll on stores that need to move merchandise.
Now, theoretically, low prices seem like a good thing, except when they are a reflection of stress in the business cycle. When demand dries up, inventories build to unacceptable levels, which forces businesses to lay off workers or close plants and stores. Fear spreads through the economy. This leads to greater reluctance on the part of consumers to consume, so they save a little harder and buy a little less. Logically, that also means more unemployment.
Taken to the extreme, the result is deflation—a condition of persistent decreases in prices brought on by reduced personal and government spending and investment.
In the first few months of 2009, we have seen a steady rise in the number of first-time jobless claims climbing above 600,000 a month. The "official" unemployment rate has topped 8.1 percent. The total number of citizens collecting unemployment benefits is more than 6 million. When you add in the underemployed, the so-called discouraged workers, and those who have exhausted their benefits, the number is closer to 11.6 million.
For public employees, jobs assumed to be secure are less so because the tax revenues that pay those salaries come from stable to growing property values and employment taxes. States and school districts across the nation are cutting budgets, issuing notices of layoffs and nonrenewal, and cutting general services.
The chances that this recession is going to last for quite some time are pretty good. Even President Obama has cautioned that things may get worse before they get better. But we have at least the first legs of a stimulus/recovery plan in place and some very bright people working to reboot the economy.
I'm not advocating a return to the era of spending as recreation, and I have always stressed the concept of establishing a reasonable cushion of savings (at least six months of normal expenses) and living below your means.
But after that, it's OK to buy stuff. It's good for the economy to take advantage of the low prices that exist in virtually every sector of the marketplace. There are also real bargains in the stock markets for those who have a distant horizon ahead. Prices may go lower before they turn around, but one day we will look back and see that this period was one of the greatest buying opportunities in our lifetimes-for stocks, for homes, for cars.
What does that mean for you? If you were never an investor before, it means you can make up for lost time by buying today at 1995 prices. You can get a jump-start on an investment portfolio by educating yourself about no-load mutual funds and the markets in general. It means researching how you can build a balanced portfolio of funds to make your long-term goals a reality.
It's okay to use some of that cash you have parked on the sidelines and get into the stock market. Maybe not today, maybe not this week; but if you wait until you think the market will recover, it probably already has.
As for me, I don't plan on spending all of my next annual folio of columns wringing my hands and lamenting the fix we've gotten into. I know the "Serenity Prayer," and this is one of those things I can't do anything about. But I can take advantage of opportunities when they present themselves.
I know it's your money, and with fear in the air it's easy to pull back and to think that putting off spending is the right thing to do. But consider the paradox of thrift: The more you save, the more money is taken out of circulation and the worse the recession can get. Savings is a virtue ... until it isn't.
Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to email@example.com .