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Spending vs. savings during these unnerving times
Into the teeth of this economic gale, I had to make quite a spending decision this week. It wasn't a frivolous purchase - not the $5,000 carbon-fiber bike to replace my aluminum one. That would have been easy: Not now.
The spending decision at hand was the fall tuition, room and board payment for my daughter, entering her second year at college. The cost: $26,665. And that just covers through the new year. In our family, education is probably the most noble use of money, so we didn't hesitate, despite the nausea-inducing size of the check.
What did induce some seasickness about education spending came later in the week. With Marketplace Money host Tess Vigeland away, I'm filling in as host and spent the week examining our theme for the show: spending vs. savings during these unnerving times.
I was interviewing a nice person from Chicago who had opted to get a masters degree in international relations after a successful career in human resources. Sadly, she had graduated into the economic meltdown of 2008 and couldn't find work. Without work, she couldn't pay her students loans, which hurt her credit report. On the verge of what might have been a nice job offer, that credit rating came back to haunt her.
If spending even on education can indirectly have such negative consequences, maybe we need to think long and hard about other less important kinds of consumption. Consumer advocates say we may also need to take a long hard look at growing fondness of companies using credit reports for hiring even non-financial jobs. Links between job performance and credit score are elusive.
Sure, many folks we talked to on the show preach savings as a strong default position for our personal finance posture. Yet what about the Paradox of Thrift: if many of us save at the same moment, demand dries up and the economy hits the skids. Such is one of the costs of an economy so based on personal consumption.
Spending and saving can affect the social glue that is our economy. If everyone spent more though on things such as what they need rather than want than producers would keep up by providing those products and services. If everyone also considered if their purpose in spending was in line with their life goals and values that would also create a society filled with individuals with high well-being but also an economy that could keep lifting all of us up at the same time.
I keep hearing that the lack of confidence by Americans, as expressed by a decline in spending, is at the core of the anemic job creation numbers of recent years- "if Americans start spending more, more jobs will be created." Crisis resolved! What I'm not seeing or hearing is any discussion of the larger-than-ever CASH economy in this country, where all that CASH is coming from and how it is affecting our day-to-day economic lives.
I do see record amounts of unreported CASH changing hands in real estate deals, at auto dealers, at wholesale vendors of groceries and household goods, as well as at Costco, BJ's, Walmart, etc.
Problem, as I see it, is not only the spend/save conundrum (you and Mr. Kone have articulated that very clearly), but rather where all this unreported CASH is coming from, what we're buying with our money (unreported or on the books) and how a CASH/off-the-books economy of the magnitude we're experiencing affects the U.S. economy.
The overwhelming amount of food and "stuff" being purchased (other than real estate) is not produced in this country and, therefore, not creating any real U.S. jobs other than a few stevedore positions to unload the ships from abroad, a few landfill jobs to handle all the non-recyclable garbage generated by all that "stuff" and low-wage retail jobs to re-arrange the "stuff" on the shelves at Walmart and Target. Even garlic is being imported from as far as China; it's not even coming from Mexico, right next door.
Can we look forward to expanded coverage of this CASH economy on MARKETPLACE? I know of many people who are eager to hear from MARKETPLACE on this issue.
The paradox of thrift does not exist. It only exists if when you save money you burry it in the garden or stuff it in your bed. Normal people save money by putting it in the bank. The bank does not hid it in a bed either.
Sure, you are not buying something right now, but savings do get spent on things later. In the mean time that money saved in the bank allows the bank to loan out more money to businesses and people.
The press keeps telling us that businesses can't get loans is the biggest issue right now. (I don't know any business owners who feel that, but the press says it is so) They can't get loans because there are no savings to be loaned out.
We have been told that for the economy to be "fixed" people need to start spending like they did back in 2006, you know, spending 5% more than you earned by maxing out the credit card. This is what the experts want us to go back to, spending more than we earn every year to avoid the "paradox of thrift"!
But really, which is the better economy? One where people spend 5% more than they make year after year and hope they get a better job next year. Or one that saves 10% of what they make each year?
The first can't be sustained because there is no money set aside to be loaned out to build the means of production. The second has a strong sound banking system to make loans to businesses so they can build or improve. The second example won't have big crashes because people will spend that savings at some point in a steady manor and won't see the friction of interest eating up past spending.
Look at China, they have a savings rate of 50% and growth nearly at 10%. So much growth from that savings that the China Gov is trying to slow it down. But here in the (I.O.)U.S.A. we have a growth rate that makes anemic look healthy and no savings rate to talk about. Yet not saving is held as a good thing?
Besides, with todays people, what are the odds of many people saving so much that it dries up demand?
