Paradox of Thrift
(image found here)
Have you heard of the term, The Paradox of Thrift?  Simplified, it means that what is best for the individual may not be what is best for the collective. If you decide to tighten your budget during difficult times, and if you’re unwilling to spend money on unnecessary items, that’s good for your household budget. It’s smart to not let yourself spend more than you make, and it’s smart to save money and be careful with what you do spend. The overall economy, however, is based on growth, which means consumers buying more each year than they did the last year. If you spend exactly the same every year, and so does everyone else, the economy is flat. If you spend a little less every year than the year before, and so does everyone else, the economy shrinks, which means loss of jobs and lower prices. Lower prices seems like a good thing, and it can be, especially after a time of increased inflation, but it can also mean more debt to the companies selling the products, and therefore, more lost jobs….again, what’s good for you and me (lower prices) might not be good for the economy (shrinking profits=lost jobs).
I’ve been listening to the NPR podcast, Planet Money, in which they take complex economic concepts and break them down into understandable language for the non-economists out there. I have found it very helpful in understanding credit default swaps, naked short selling (not as sexy as it sounds), that kind of thing. Understanding how our economy got into its current dreadful mess. Which doesn’t help me to DO much about it, or to even quite know what to do, but at least I have a better idea of what is going on than I did before this whole mess started. Pop on over to their website, it’s very helpful.
Back to consumer spending. There’s a group called the Conference Board, and one thing they do is to take a poll and determine consumer confidence. According to their most recent survey, which is based on polls, not on actual numbers, consumer confidence is at its lowest point in 35 years. That’s when they started taking this poll, so they can’t speak about times before that. Low consumer confidence means people not spending. Not just not spending more than they can afford, but perhaps putting on hold some purchases that they can afford, because they’re more worried about having money in the bank should a crisis arise than they are about having a new washer and dryer. You guessed it. Smart for them, bad for the economy.
I sometimes wonder if this whole consumer economy is such a good idea anyway. The idea that we always have to spend more than we did the year before, just to keep our jobs, is counter-intuitive, and beyond that, it’s not sustainable. Our planet cannot keep up. Our bank accounts cannot keep up. I would argue that our souls cannot keep up. That constant desire to have more, the ‘want to want’, is bad for you. At least, I think it is. So, what to do? I don’t know. I’m not going to go out and spend more than I have. Especially with Ted not working right now, our belts are fairly tight around here. But I’ll do little things, I guess. I’ll buy inexpensive Christmas gifts, which while not as good for the economy as expensive ones, are better for the economy than no gifts at all.
How about you? If your personal economy hasn’t changed (still working, no great change in expenses or income), have your spending habits changed at all?
12 Comments
lalunas
It is really hard on the retailers now, they are all suffering, with the exception of Walmart and Costco. Last week I was a vendor at a craft type fair. I made a bunch of stuff and prices it so low that many people mentioned that the prices are really too low for the products. But very few people actually bought. It says a lot about spending right now. Of course I cannot spend as much being in the same boat as PY. Something has to give, cause there are going to be more and more unemployed people because of this current wave.
~Sheryl
My family used to be great for the economy. Now we have had to become much more “aware” of where our money goes. Since 2006 our income has gone down 15%… yep… 15%, between job changes and pay cuts, my husband and I make 15% less than we did 2 years ago. I really can’t calculate how much our expenses have gone up. We added a vacation property (before the cuts, obviously), we added a child and as we all know the cost of many things, including utilities has gone up.
As a family, we are definitely feeling the effects of this rough economy. We are still very fortunate as we both still have jobs, a roof over our heads and food on the table. But grocery shopping has now gone from “ooo, that looks good, let’s try that” or “hey that’s on sale, get 3 or 4” to shopping off our list and not buying meat if there is still meat in the freezer that hasn’t been used.
I love Michigan, but man is it a struggle right now. But I am also an optimist person. I believe things will right themselves in the future. By next week? Probably not. But within the next few years, I definitely believe it well.
Sorry about the long comment. I guess I should have used this as a post on my own site. Lol Well NaBloPoMo is coming up, I will probably borrow this topic.
Ted
That’s the sad part of consumer capitalism, isn’t it. You know, you have to consume in a rapacious way in order to have a job. Plus, as you said, it creates a culture that’s more enamored of “stuff” than other things.
Autumn's Mom
I think only in the past couple of months has my spending changed dramatically. Could it be the growth of my family??? My thoughts about spending have changed. We just don’t go out and have shopping days for the heck of it anymore. There are only our needs and a prioritized list. HOW BORING. I know that change is inevitable. We’ve had recessions. And we’ve had growth. I’m still looking for the light at the end of the tunnel. Cuz I miss shopping days.
apathy lounge
Well…income has increased, but so have the expenditures. Two kids in college and one in high school. It’s hard to get ahead.
Starshine
It is a good reality check for our souls, isn’t it? Living in Spain six years ago was a good wake up call for me. My friends often wore the same outfit a few days in a row, and it was no big deal, and soon, I started to do the same. I realized that I need far less than I thought I did, and I was just fine.
Jimmy
Well…..I’ve had to cut back on the Chardonnay,and start drinking more Miller Lite!
No seriously……I did away with my more expensive cable TV expanded channel package and went back to the basic package. That alone is enough to buy a tank of gas or a couple of cases of beer?
I threw away $5 bucks on the NC Lottery today…yep…I blow about $10 a week on that crap???
Must be the redneck in me?
Jimmy
Oh, so Fannie Mae & Freddie Mac were trying to keep us out of “The Paradox of Thrift” by making it so easy to get those loans we couldn’t pay back????
Irish Gifts
I’d say that we’ve tightened our belts somewhat (though a new transmission did not help yesterday!!!). Speaking of which, it may be time to downsize to one car…
We’ve built a nice house of cards in the last few years. Our consumer economy basically relied on people spending more than they had, creating the illusion of growth. Now that credit has dried-up, I think we will see the spending continue to be reduced.
J
Jimmy, add the other banks to that list, as well as the credit card companies, car companies, etc. They all want us to spend, and couldn’t care less whether we pay it back or not. And as long as home prices kept going up, it worked for the banks, because they could get their money back if they had to foreclose. But now that prices are crashing, they’re in real trouble. I think it’s greed, and on the parts of many, many people. Not just the consumer. Not just the banks. Not just the credit card companies or Freddie and Fannie. Not just the investors who demanded more mortgages to invest in, when all of the ‘safe bets’ were already taken. It’s a big ugly house of cards.
Donna
Things have always been tight with us, so not very much has changed. Not having a car and putting out the money for some good bikes has been the best investment this year for me. Guess the past 10 years or so was just preparing me for the current situation – we’ve only had to make a few minor adjustments. I still set aside some money for crazy shopping days, cos you just gotta do it every so often. Just that the “crazy” budget has been cut a bit so we do get as crazy as we’d like. Good thing i’ve been hoarding crafting supplies, i’ve got enough stuff to keep me busy for a long time. 🙂
Shelliza
I’ve cut back significantly on “extras”. With the exception of lunch once a week, we don’t eat out. I’ve been good with bargain shopping for a while now but the change in our family has caused me to be careful with every dollar I spend, so unless we need something, I don’t buy it.