Don't be frugal to follow recession chic
It's natural to want to penny-pinch when in a recession, but if you're not at risk of financial struggle, you may not need to cut back. Commentator Will Wilkinson says if you can, you should keep spending.
Commentator Will Wilkinson (The Cato Institute)
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TEXT OF COMMENTARY
Scott Jagow: The National Retail Federation says less than half of Americans have finished their Christmas shopping. That's a 10 percent drop from last year, and a clear signal of procrastination. Commentator Will Wilkinson says people who can should get on with it.
Will Wilkinson: Penny-pinching is a time-honored recession tradition. For those who've lost a job, are dealing with reduced hours or wages, or face a real risk of economic pain, it's plain sense to do what it takes to make ends meet in lean times. Cancel Showtime, pile on the sweaters, go unto the checkout armed with coupons. When you have to do it, belt-tightening's no joke.
But, gladly, most Americans don't have to -- not even in this economy. Most of us won't lose our jobs, won't face a pay cut. Yet we tighten anyway. Dollar-stretching tips circulate even among the most comfortable. But if your paycheck's intact and you're still cutting back, you may be part of the problem.
When home values surge, we tend to feel richer and spend a bit more, even if we don't plan to sell the house. Economists call this "the wealth effect," and it's got a recessionary flip side. So when our 401(k)s dive as the economy hits a rough patch, we feel a bit of a pinch and rein in consumption -- even when our incomes and the long-term value of our investments hasn't changed a bit. In short, we don't always look to our personal financial fundamentals when choosing whether to splurge or scrimp.
But just as "irrational exuberance" can keep a speculative bubble afloat, equally irrational anxiety, and the ethos of austerity it produces, can trap us in the doldrums. So maybe you went a bit crazy during the boom, and now's the time to return to financial sanity. Good! But if you were living comfortably and responsibly within your means last year, you probably don't need to cut back now.
Of course, none of us is duty-bound to stimulate the economy by snapping up 50-inch plasma screens just because we can afford it. But if you're blessed with good fortune in these hard times, you're not helping anyone if you let frugality chic stop you and yours from having a very Merry Christmas indeed.
Jagow: Will Wilkinson is a research fellow at the Cato Institute.
Comments
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12/20/2008
Research fellow, eh? Sure...... whatever you say.
From Wichita, KS, 12/19/2008
The only reason we are not in hot water now that my husband's hours have been reduced is the fact that we always live frugally. In theory, we could afford a lot of things, but since we don't have a crystal ball, we choose to live like we won't always be swimming in a river of money. Because we chose to buy a modestly priced home, did not rack up credit card debt, bought fuel efficient, reliable cars and used coupons when the going was good, we're doing fine in this economy. Frugality is not just a fad- it's a way of life that has given my family enormous freedom, even when the bottom started falling out of the economy.
http://frugalhomemakerplus.blogspot.com/2008/12/this-just-in-im-selfish-miserable-miser.html
From Richmond, CA, 12/18/2008
I do not think that Mr. Wilkinson comprehends the "uncertainty factor" that most of us include in our everyday decisions. When the economy is a graph of sin(pi/x) and points are hitting the ends of the scale with increasing frequency, people will not take unnecessary risk.
From CA, 12/18/2008
I think that many people are mis-interpreting Mr. Wilkinson's comments. While I disagree with many of the policy statements that come out of the Cato Institute, in this commentary Mr. Wilkinson is not suggesting that everyone go out and buy a bunch of things that they don't need. He is suggesting that "consumer confidence," as evidenced by consumer spending (and these are among the key indicators of economic health, which then cause stock prices to rise and fall as people try to anticipate the direction of the economy) are damaged when people who are financially secure and would like another sweater--even if it's only 24.99 at Old Navy, not cashmere from Bloomingdale's--choose to keep wearing the one that's pilling and faded rather than buying a new one. Particularly if you are a consumer who supports local business as opposed to shopping at Old Navy/Borders/Walmart, etc., if you have the means to continue treating yourself to a latte/new book/nice meal/shirt and choose to do so, you're helping to sustain businesses and jobs and tax revenues in your local community, which in turn affects funding for your local schools and libraries, property values, and the positive energy of your neighborhood. I would certainly prefer to budget for my Saturday latte on my weekend dog walking excursion, and walk past a vibrant locally-owned business than drink tea at home and walk past a storefront with a for lease sign in the window.
Furthermore, Wilkinson says "if you were living comfortably and *responsibly* within your means, you probably don't need to cut back." This is his target audience for the commentary. If you had/have a budget in which savings and charity come before frivolities and you can continue to satisfy the essential line items in your budget, you don't need to eliminate the treats completely (especially if they were purchased locally!). If you refinanced your house to buy a car, purse, vacation, or have so much credit card debt that you can only afford to make the minimum monthly payment, then yes, you should pinch a lot of pennies. The reason our economy is in the state it's in is because too many people practice selective hearing: they focus on "spend, it's good for the economy," rather than hearing the entire admonition to live within your means, and if your means allow you to buy gifts for others (or yourself) after you've saved for yourself, then you shouldn't feel guilty about continuing to do so. (And frankly, I find it hilarious that selective hearing, however well-intentioned, seems to be generating so many of the indignant responses here) I think the takeaway from this commentary is: make a financial plan that accounts for worst case scenarios in your own life, not someone else's (that's the difference between rational and irrational anxiety). Save aggressively and *budget* for special things. And then (here's my personal soapbox) shop at locally owned businesses in your own community! (and take your own bags, while you're at it) When you localize this principle and think about making responsible financial choices that allow you to use your discretionary income to support the entrepreneurs in your own community, the argument is far more compelling than when you imagine spending tens, hundreds, or thousands of dollars to help the ceo of some huge company headquartered in another state (or even country) keep his investors happy, or to keep up with the Joneses.
From Arlington, VA, 12/18/2008
The reason that my family is not in the dire situation that many are is that we don't believe that frugal is simply a fad.
My husband and I both have advanced degrees, make a middle class income, and we do not carry any debt other than one car payment and our mortgage.
If that makes us irresponsible consumers, then there is something wrong with a marketplace that demands consumption that harms our environment and requires slave and child labor in other countries to sustain it.
Will Wilkinson's comments reflect the kind of mentality that got many Americans in over their heads.
From New Paltz, NY, 12/17/2008
I nearly choked on my soy milk when I heard this commentary this morning. It's yet another story about how resisting the urge to spend as much as possible this Christmas makes you worse than Scrooge - it makes you the scourge of capitalism and the American way of life.
I make no claims about having much knowledge of the economy. Nearly all of my news comes from NPR, and I know that's not like being a daily reader of the Wall Street Journal. Maybe the commentator is exactly right and austerity is one of the factors that makes an already shaky economy begin to look even worse.
My issue is not with this interpretation of the the law of supply and demand, it is that we are stuck in a system that can only be salvaged if we acquire more stuff.
The financial crisis is showing us that we need to make fundamental changes at so many levels. We need to examine our relationship to wealth and to consumerism. Telling people to put that off and falsely assume that today's prosperity is going to carry forward into the future is only prolonging the difficult adjustments that we are all going to have to make.
Our planet cannot sustain this breakneck pace of growth. We need to heed the warning signs in this economic crisis and alter our behavior now.
More at: http://epiphanygirl.wordpress.com/2008/12/17/frugality-is-not-a-crime/
From Dallas, TX, 12/17/2008
Will,
I wholeheartedly disagree with you. The logic behind your argument that those with the ability to continue spending should makes sense only if you discount one crucial caveat - the increasing likelihood that the those in a position to continue spending are greatly outnumbered by those in opposing situations.
Make no mistake, this is hunker-down time for many Americans who are and are not in sound financial shape. The slowdown in spending probably has as much to do with financial means as it does with a likely return to prudence - one being borne out of necessity.
I think it can be widely accepted that there was simply too much spending, too much building, too much lending, well you get my point. There must be a necessary pullback.
From Minneapolis, MN, 12/17/2008
Hearing Will's commentary struck nerve on me. My income supports a chosen middle-class lifestyle. After surviving unemployment post-9/11, I save near 50% of my gross income every year. I know what it looks like coming to the end of my own financial rope. As a single person, there is no one to catch me when I fall, and if losing my job then I will surely splat (not bounce).
I'm not spending to support the economy, so surely I'm a crummy consumer. Yet I am investing my savings into market equities and financial instruments, which I feel does far more to support the economy than spending on planned obsolecence of material items I don't need. Since no job is 100% secure, I will cut back my consumer spending all the more to conservatively endure the looming likelihood of becoming expendable human capital. Who else can I count on,.. other than me?
From St. Paul, MN, 12/17/2008
I was disheartened to hear Will Wilkinson's comments this morning. Rampant cosumerism has contributed largely to the mess we are in and his advice is just to keep buying? Please. During this economic crisis, we have an opportunity to examine our "American values." Let's think less about buying things and more about investing in people. I'm fortunate enough to have a good job and I feel a responsibility to do what I can to help turn the economy around. But not by buying more stuff. This year, we gave more than we ever have to non-profits that provide services for those facing poverty and to those arts organizations that will suffer as their funds dry up. This helps to keep people in my community employed and also helps those who have lost their jobs. So during the economic downturn, don't buy, give instead. It stimulates the economy and the money you spend won't break, wear out, get boring, or end up in a landfill somewhere.
From sunnyvale, CA, 12/17/2008
Even though I am employed I do not feel I have any job security. So I am going to purchase a new LCD? No! Perhaps a employees of the Cato Institute such as Mr Wilkinson can do these things. The $700 billion to subsides the rich bank exec. has not made any difference on our daily lives. We are still living from paycheck to paycheck and now we have a heavier burden since we are to pay back for negligence of the brilliant overpaid exec.
This tells me that people in the Cato intitute do not have to worry about their jobs.
From Collingswood, NJ, 12/17/2008
I don't know to whom Mr. Wilkinson is speaking, but it's not to me and my family. We are middle class and have almost no debt. If we go out and spend and then we suffer a job loss (and who, at this point, is going to guarantee we won't?), do we contact Mr. Wilkinson or the Cato Institute for help?
Sorry, we are going to save!
From Raleigh, NC, 12/17/2008
Preposterous.
With the $700bn bailout, I'm _already_ going to be spending more to help the economy. It's called taxes, unless the fed has discovered a magic replenishing money supply. So I'm already feeling like I'm the one being asked to pay for everyone else's mistakes because I was frugal and responsible during the boom.
And now you're asking me to spend even more? That's simply not going to happen.
Any extra I have will go to an actual charity, as opposed to some bizarre "trickle up" economic fairytale.
From Cedar falls, IA, 12/17/2008
I was quite disappointed to hear this story this morning. Pundits (sorry Will) continue to tell us what to do with our money...spend, invest, refinance...yet few have predicted this market downturn, leaving many consumers in the market on the short end of the stick. What is interesting is some very unpopular people have talked about this for years, only to be ridiculed repeatedly...that is, until their predictions come true. We are at the disposal of the government's creative financing program that has their fingers in the cookie jar too deep, experimenting with what they see as a endless supply of cookies (and in the process burned up the majority of our 401K's). So in my book, there is no better time than now to trust our guts and speak quietly through our wallets.
From bryan, TX, 12/17/2008
Spending during a recession: It is better for those with money to spend for the benefit of those who don't.
This is always a good practice. Is it not better to feed a starving person, than to overeat for the sake of prosperity? If done for the right reason, both the health and disposition of each party will improve. Who loses?
From PA, 12/17/2008
"irrational austerity"? With unemployment on the rise and layoffs seeming to affect every service and industry segment, it seems irrational not to pull back on spending and hunker down for what could become, not just another news story but rather a personal financial problem.
From Largo, MD, 12/17/2008
I think we have to stop and rethink all this encouragement to spend our way out of problems. When we had the challenges at 911, our President asked us to spend our way out. When the House Values plummeted in addition to credit card debt increasing, we are being asked to Spend our way out. When are we going to learn that we do not have the funds to spend. Will, even those you say have the means do not have. Let this process run it's course so that we can go through this diet and get back into shape. What happens when all this free money comes back into play do we move from deflation to hyper inflation. Oh by the way, what is the percentage contribution of this spending to our national debt, we borrow to spend on things we import from others...
Thanks
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