Consumers ending love affair with debt
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TEXT OF INTERVIEW
Tess Vigeland: We’ve already been to the car lot on this show, so how about a trip to the mall? We decided that would be a good place to meet up with our economics editor Chris Farrell to talk about his new book called “The New Frugality: How to Consume Less, Save More, and Live Better.” The scene: Glendale Galleria, a few miles north of Los Angeles.
Well, Chris I’m so glad we could go shopping together.
Farrell: Absolutely. I’ve never been to a mall with you. This is a first.
Vigeland: I know and I’ve even been to Minnesota to visit you and we have not gone to the Mall of America.
Farrell: All right, your next trip, we will have to go to there. At least walk in.
Vigeland: OK. Fair enough. Now you say early in your book that our love affair with consumer debt is over.
Farrell: That’s right.
Vigeland: Look around though, and I wonder if you really think folks here are paying cash for all the stuff that they’re buying. There are a lot of people here in the middle of the afternoon.
Farrell: There are a lot of people here, middle of the afternoon. They’re probably taking out their credit cards, but more people are pulling out a debit card than a credit card. In 2008, those lines crossed, where debit card usage was greater than credit card usage. So one guess I have is a lot of people are using a debit card.
Vigeland: Although I did see from CreditKarma.com that in the last six months of last year, of ’09, credit card usage among people who have cards actually did go up by about 20 percent.
Farrell: That’s right. But overall, people are paying down their debts, and they are saving more. I mean, that’s really been throughout the Great Recession, mainly because we have a 10 percent unemployment rate. If you take a broadest measure of unemployment, it’s 17.3 percent. And so there’s a lot of nervousness out there, people have been afraid of whether or not they’re going to be able to keep a job, are they going to get any pay raises — I mean, how many people do you really think are going to be able to march into their boss’s office in the next year, two years? I would even go so far as three years…
Vigeland: Say, “Give me more money!”
Farrell: And say, “Give me a 10 percent raise or I’m leaving.”
Farrell: And they’re going to say, “Good bye.”
Vigeland: Now, we’ve discussed this before, and I think we’ve agreed to disagree what this Great Recession is really going to mean in the long term. I just don’t believe that it’s going to have long-term effect on people’s spending and saving decisions. But give me your argument for, perhaps, believing in our society more than I do. What is the “new frugality”?
Farrell: Well, a couple things. First of all, we’re still going to be borrowing, we’re still going to be spending, we still are a consumer society — but the pendulum swung way too far in terms of borrowing, relative to what we’re earning. And so we’re going to go back into a better balance.
And there’s a couple of forces that are going to drive us toward a better balance. First of all, it’s going to take a long time for the banks to repair their balance sheets. So they’re not going to lend you the way they did in the past or to the consumer. And regulators, they have been embarrassed. On their watch, all this bad stuff happened. So they are going to enforce a certain conservatism. Now, the other side, the consumer. What are people learning? They realized that we don’t have enough of our own savings, enough of our own safety net. And that’s the lesson and that’s the conversation that’s going around about being smarting about savings, as opposed to bragging about how much you can borrow.
Vigeland: I want to take you to another element of your book, which is… you really use a good chunk of it as a bully pulpit for sustainability.
Vigeland: And you say that leading a sustainable lifestyle can actually help our pocketbooks.
Farrell: That’s right. And this is what I think makes it the new frugality. I remember my father, every night, unplug the appliances and I always thought that was ridiculous. Why would he do that? He did that because that saved money. But now people are doing it because they think it’s better for the environment. Lots of people learn that being green and being frugal can reinforce each other. It’s a really optimistic act, because you know what? You believe you’re making a difference, and I do believe that you are. And that’s why it’s the new frugality — we’re doing in consciously, we’re doing it to make the world a better place and that’s going to reinforce the savings.
Vigeland: And finally, at the end of the book, one thing you talk about is finding the right balance between saving and spending and this notion of smoothing out those habits over a life time. So many of us are obsessed with saving for retirement, and you argue at the end of the book that a. spending’s not bad and b. you really need to think about not saving all of your eggs for the end of your life.
Farrell: Yeah, you don’t want to go from one extreme to the other. And there’s a big difference between being frugal and being cheap. So if all you do is save, you are fundamentally a cheap human being. At the same time, you don’t want to be 40 years old, have borrowed to the hilt, with an economy like we have today, worried about losing your job. So it’s trying to achieve this balance and the new frugality, or embracing frugality, is the way to go.
Vigeland: Well, I certainly hope that you are right. Thanks so much Chris. And we’re standing outside Abercrombie and Fitch — if you’d like you’re more than welcome to try on some baggy pants.
Farrell: Well, that’d be a look for me. How about a cup of coffee?
Vigeland: Oh, I think that works for both of us.
Farrell: Much better.
Vigeland: Let’s go.
Vigeland: Keep that image, folks — Chris Farrell in saggy pants. His new book is “The New Frugality: How to Consume Less, Save More and Live Better” and you can buy it through our Web site, Marketplace.org
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