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Monday, February 2, 2009

The Recession We Need: Toward a New Economy

AP economics writer Martin Crutsinger reports that Americans are doing exactly what I hoped they would: buying less and saving more. Even as jobs disappear and wages remain stagnant, we Americans are putting more money in the bank. The bunch of us socked away 2.9% of our after-tax incomes in the last quarter of 2008. That's up from under 1% a year ago and two straight years of negative savings rates in 2005 and 2006.

From the tone of Crutsinger's opening lines, you might think such saving is a bad thing:

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 [Martin Crutsinger, "Americans Save Just When Economy Needs Their Money," AP via Forbes, 2009.02.01].

Did you catch that headline? "...Just When Economy Needs...."

Tell me, please, who is this "Economy" you speak of?

I've discussed this paradox of thrift here previously: if we all act sensibly, pay our debts, and save our money, we drive an economy that depends on ever-increasing spending into the tank. Act like a good American, destroy the American economy. Uh oh.

If our economy can only be sustained by such wild spending and "harvesting cash out of... home equity," which Cornell economist Robert Frank calls an "illusion," then maybe that economy needs destroying.

Thomas Friedman discusses the unpleasant sense at Davos that no one has the answer, the "magic bailout package," to pull us out of this recession and make the economy all warm and fuzzy like we thought it was:

A broker friend told me it reminded him of when he was a teenager and his doctor first diagnosed him as unable to digest wheat products. He said to the doctor, “Well, just give me a pill.” And the doctor told him: there is no pill. “You mean I’m just going to have to live with this?” he asked. That’s us. There is no pill — not for this mess [Thomas Friedman, "Elvis Has Left the Mountain," New York Times, 2009.01.31].

Friedman gets it: fixing the economy is about "getting our fundamentals right again." The "economy" can't rely on absurdly easy credit, negative savings rates, and hyperconsumerism. Frugality is a virtue, and the economy—business, labor, and government—will have to adjust. If we stick with this new frugality (and Crutsinger cites experts who think "consumers have been so shaken by how fast their wealth has shrunk, so burned by credit card debt, that they might not resume their robust spending for years, if ever"), we will need to build a new business model, based not on frenzied marketing to ever-inflating desires, but on the slow, steady production of goods and services people need.

Oh yeah: people. The economy is about what people need. Let's try to remember that as we rebuild the new economy.


  1. Pulling back spending completely is not the key to fixing this problem.

    Controlled spending in a deliberate, responsible manner will actually put people back to work. Shutting down completely simply enhances the devasation. People should perhaps cut out the frills, but not normal spending patterns, provided your income is steady.

    A quick trip to Sioux Falls this weekend revealed mall traffic and parking similar to Christmas time and 45-minute waits at the restaurants, so who am I to say, "keep spending something"?

  2. joe "join the Army" nelson2/02/2009 1:59 PM

    I think with globalization, the consumer spirit has spread. I am happy to hear that Americans are spending less and saving more, but I do not think it will last. Our economy, and many jobs, are built upon the constancy of unnecessary spending. It is a teat we have suckled on, and now we will never get off. What will all the automakers, as in , the people that actually build said cars do if healthy Americans are not buying or leasing a new car every year? And our farmers and ranchers, who do provide a necessary product, are not getting paid enough, and are now dependant on federal subsidation (crud, that was a blanket statement! I realize there are farmers out there who are not subsidized, but the point is clear). Education is a necessity, but school teachers are given the shaft as well.

    I have no point I realized, just a rant. I have even left the ranks of the civilian world, and now live in a world where not only am I paid well, but I get money for food, clothing, housing, as well as free health care and medication (thank you, tax payers!). Maybe I should not be complaining about the woes of the civilian world, because this bad economy will not hurt me; I have job security (if the economy ever gets bad enough, we will just invade a country).

  3. Anon 1:11: But cutting the frills is exactly what Americans are doing. We've been depending on frills to produce economic growth, and now common sense is killing the false economy. It is exactly the "normal spending patterns" of the past decade or two that got us into this mess. We need a paradigm shift in what "normal spending" means (and what the economy expects).

    I must admit, Joe: I wish we lived in a world where soldiers couldn't count on having a job tomorrow.


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