Not Spending Makes Economy Worse

Jade Moon
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Wednesday - January 28, 2009
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Carl Bonham

So here it is, the Catch 22 of our time:

Do we hunker down and save our money in these scary economic times? Or do we spend - and spread the wealth - as we always have?

Right now, I can tell you what most people I know are doing, and I’ll give you a clue: The cash is firmly clenched in their newly tightened fists. People are eating out less, driving less, buying fewer nonessentials, putting off big purchases. Some are doing it because they have to, some because they feel nervous about the future. Some, although unaffected personally by the recession, are keenly aware that profligate spending is tacky and insensitive when so many others are suffering. So even the rich are laying low.

But is all this fiscal prudence actually making things worse?

There’s a name for this syndrome: “The Paradox of Thrift.” UH associate professor of economics Carl Bonham explains it this way: The more you save, the more you reduce demand, and the more you help slow the economy. Even if, he says, “you and I go out and buy a flat-screen TV or a car, lots of people won’t in times like these. And so we pay the price when we lose our job because that company went out of business.”


 

So what’s good for the individual isn’t necessarily good for everyone else. “In the short run,” Bonham says, “if we all quit consuming and save to build up our cash because we’re worried, it will make the economy worse.”

Notice he said, “in the short run.” That’s because although the economy is seriously out of whack, it is always trying to find balance. We got into this mess partly because people weren’t thrifty enough, so now we’re lurching the other way.

Eventually, when people feel safe again, all that money saved will be spent or invested, and will help move the economy forward. But that, the experts say, could take many years.

So the question for those right on the edge is- how long can we hold on? How many will lose everything before we’re back on track? Can we survive while our economy rights itself? And can we do anything to lessen the pain and speed the process up?

One of the ways President Obama’s economic team is trying to jump-start and then speed the recovery is by pushing through that massive $800 billion stimulus plan you keep hearing about on the news. Based, Bonham says, on a theory first put forward by economist John Maynard Keynes, the stimulus would replace consumer spending with government spending. “The government steps up and spends on things we need - roads and schools and so on ...”


There’s no doubt our economy is shrinking. I won’t get into the whys because the housing bubble and runaway credit have already been documented by countless others. By now everyone agrees that things will get worse before they get better. If the recession is allowed to run its course without intervention, Bonham says the President’s Council on Economic Advisers has concluded unemployment will continue to rise and could peak at around 9.25 percent in mid-2010.

The stimulus package would not prevent all job loss but would bring the unemployment rate down - to a peak of around 8 percent later this year.

In other words, even with the stimulus there will be pain, just not as much. And the recovery will go from glacial to merely slow.

Bonham says he would never tell us to go out and spend or to buy a new car to get somebody else out of debt. People have to determine what’s best for them at the moment. It will be up to the government “to set up situations to encourage them to act for the good of the collective” by doing the borrowing, providing jobs and encouraging buying.

It’s possible, he says, that as we move back in the direction of balance the overall economy may grow more slowly than we’ve been used to. But that’s not a bad thing.

Will this deep recession change us? Are Americans going to become a nation of savers? Bonham says there may be some truth to that, although he’s skeptical on the extent of it, how big a change it will be. Some change, he says, is being forced on us already. The hope is that we’ve learned it’s too expensive to go back to our old ways.

In the meantime, hang in there. Do what’s best for your family at this difficult moment in time. And know that we will find the balance once again.

 

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