Spend Matters…So Does Saving — The "Paradox of Thrift"?

This morning, I'd like to welcome William Busch, VP of Sales for Spend Matters. Bill has over 30 years experience sourcing and contracting for a variety of organizations including The Wharton School at The University of Pennsylvania. Please join me in officially welcoming Bill to the blogosphere.

The Wall Street Journal published a-sign-of-the-times article on January 6, 2009, Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes, by Kelly Evans that poignantly sums up the plight of average Americans in this current recession and very possibly beyond. It's a story of two families in Boise, Idaho -- one having been laid off, the other still working -- and their extraordinary efforts to save cash and reduce personal spend. Evans writes: "As layoffs and store closures grip Boise, these two local families hope their newfound frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decades long buying spree, are finally saving more and spending less -- just as the economy needs their dollars the most...But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift." U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years. That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures."

While economists call this the "paradox of thrift" we can only marvel in hindsight at the volume of consumer credit that our financial institutions dumped into the marketplace over the past few decades and the extent to which most of America sucked it up. Evans quotes data from Moody's Economy.com and the Federal Reserve: "In the American buying spree of recent years, the most profligate spenders were those under 35. As recently as 2006, for every $100 these Americans earned, they spent about $117. Those aged 35 to 55 had negative saving rates nearly as large. Only the large number of Americans 55 and older, who have always had high double-digit saving rates, kept the overall saving rate above zero..." This data offers fascinating and tragic insight to the booming culture of spend that has defined the US since the late 1940's.

Evans tells us that "at Home Federal Bancorp [in Boise], a $725 million bank with 15 area branches, the number of new savings accounts was up by 26% in December from the previous year...”. While this profound change in consumer behavior may appear to present a negative stimulus for the economy, I strongly believe it is way over due. Elizabeth Warren, "a professor of law at Harvard University who last month was named chair of the Congressional oversight panel tasked with overseeing the distribution of the government's Troubled Asset Relief Program funds" is quoted saying "The idea that the American family will quickly spend us out of this recession is a fantasy. It won't happen". Let's hope she's correct.

I recently had a long holiday discussion with my wise and very lucid 90 year old uncle who clearly recalled the economic reality of growing up through the 20's and 30's in a Philadelphia working class neighborhood. He wasn't nostalgic. But he vividly related how he had to save for a movie, a new baseball or a soda after school. He accomplished this by pocketing his 'street car' money (walking miles to school and other destinations -- not 5 miles to school in the snow) and picking up odd jobs sweeping stores and sidewalks. It was a pay-as-you-go culture and the lesson has stayed with him to this day. Uncle Chris has had a spectacular life -- but that's another story.

It seems to have taken over two generations for our consumer economy to find its legs. Hats off to Kelly Evans for some great local research and elucidating the irony that debt and saving contributes to our current plight. These are undisputedly rough times. But if saving returns to our nation's consumer consciousness and we resume teaching the essential lesson of living within our means, then perhaps this will all become a worthy sacrifice.

- William Busch

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