Frugality is exactly what the economy needs

Flexo over at Consumerism Commentary recently posted that frugality is bad for the economy.   Among similar statements, he says:  “The primary tenets of frugality work well within an individual’s personal finance philosophy, but once the concept becomes a movement that spreads to a greater population and businesses, the economy can’t move.”

If we look back at some of the circumstances that brought us to the current state of hurt we’re in, things were rosy.  In the first part of the last decade, real estate was no-lose.  Mortgage rates were low (due in part to an easy-money policy by the Federal Reserve that caused lenders to compete) and lending standards were lax which increased the number of homebuyers (and developers) competing against one another.  People were house-rich, and people borrowed against the rising equity in their homes to buy stuff.

This worked great, until it didn’t.  Banks failed, lending standards tightened, home prices fell.  People were trapped.  Adjustable-rate mortgages began to reset, and they continue to do so.  Those that weren’t foreclosed on are strapped, or at the very least unable to move because their homes are under water.

One can say that the economy was moving in the first part of last decade, but it wasn’t really moving on disposable income brought about by people’s labors as much it was brought on by borrowed money, and a lot of it.  Eventually the party stops, and the tab has to be settled.

Frugality is good for what ails a burnt-out economy

Following a season of excess comes a season of thrift.  People went into great debt with their houses because they could, and lots of people got into real-estate-related fields because that’s where the money was.  The problem was this: it was too much money.  A lot of money turned out to be mis-allocated when the housing bubble popped.  A side effect was that businesses all over were seeing a lot more sales because people were borrowing against their houses.  This money isn’t flowing as easily anymore, and when this is coupled with the high unemployment rate, it means harder times for a lot of businesses.

People just don’t have as much money to spend.  Or, more to the point, they have to lower credit card debt and pay off home equity lines of credit.  They have to be frugal.

This is necessary to get the economy humming again in the regular way.  Certainly some businesses are doing well now: debt consolidation agencies, used goods, pawn shops, auctioneers, and anyone else who (a) helps people to get back on their financial footing, (b) sells things that people can buy on a budget, or (c) helps people to liquidate their holdings if the bad economy gets the better of them.  But on the whole, people need to get their purchasing power back, and that means digging themselves out the hole.

Money that was mis-allocated needs to be re-allocated.  Frugality helps to accomplish this.

 

John Wedding

Husband. Father. Web publisher. Musician. John has blogged at Mighty Bargain Hunter since 2005, helping people to recognize the good deals in life.

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Comments

  1. Those in debt or with too few savings shall be frugal. However, those with more money and savings than they need should increase their spending on local services, charity, and education to help the economy.

  2. Flexo is actually right. The economy doesn’t need frugality. Saving is not good for the economy. The literal definition of economic activity is spending money. So in no way is frugality good for the economy.

    The only possible way it could be good for the economy is if frugality created stability. This cannot be the case unless 100% of the population exercised the same discipline. Even then there would be unintended consequences such as interest rates so low no one will be able to earn money on their savings and the reduced economic activity would result in greater unemployment and those people would have to dip into their savings.

    In no way then is frugality good for the economy. You’re meaning to say frugality is good for society, which it is. But the economy is built on simple math. Lack of spending adds a big negative to the economic formula.

  3. I completely agree with you. I’ve written on this before and may have to revisit the topic again. Thanks for highlighting and for including some great points!

  4. I agree with this. Players in the market that have sub-par products bought in when there was other quality options but those options were expensive. cash that was spent on poor quality can be re-allocated to better quality items via frugality, helping the best players in the market prosper and weeding out the lesser ones.

  5. Flexo was right. We don’t need frugality. We need spending to perk up the economy. It’s the Paradox of Thrift made popular by the economist, John Maynard Keynes. Over 70% of GDP (the economy) is driven by consumer spending…not consumer saving and frugality. Spending, no matter how unpopular it may be with PF bloggers, creates a trickle down of increased profits with business, which in turn results in more hiring etc.

    http://www.fivecentnickel.com/2011/09/08/the-paradox-of-thrift/

  6. It’s a circle of life…or at least of economics, huh? I think that if we were alll to subscribe to the “slow and steady wins the race” mentality rather than get hyped about bubbles, this might be diminished somewhat.

  7. I think I see where he was coming from, though… my husband and I have always been frugal, both before and after this Great Recession. We put the right amount into our investments, the kids’ college funds, our emergency fund… and we never carry credit card debt. Yet, we are still very frugal even though we could afford not to be quite so frugal these days. I think Flexo was probably talking about people like me!

  8. I think Flexo was probably talking about people like my husband and I, who have always been frugal but don’t need to be AS frugal as we once were. If we loosened our purse strings a little bit, would it help the economy? Well, maybe if EVERYONE in our position did so…

  9. We’ve always had a hearty savings fund, and live with minimal debts – I guess we could afford to be less frugal, but I’m a money hoarder!

  10. When I first read the top of the post I had to stop for a moment. In an economy where people are not pushing to the limit, that philosophy should work – but this hasn’t been that economy in a decade.

    The frugal mentality of the consumer is what stopped the economy from going too far down the wrong track; now we’re backing up to find the correct one again (I hope).

  11. Greed, excess and lack of accountability on why he bubble popped. Everyone has a share in it because of buying properties that people don’t really have the funds for.

  12. Thanks for all of your comments. Sorry that I wasn’t on top of my comment filtering.

    @weakonomist: What you think I meant to say is true, but that’s not what I was getting at. Also, who will be the people who will support things when businesses go under and people go bankrupt or lose their houses? People with cash to buy things at fire sale. People who saved.

    @hank: PF bloggers like spending money. As for Keynes, the people running the show follow him, and they’re stepping closer every day towards the edge of the cliff. The economy doesn’t thrive under central fiscal policy. It thrives when allowed to take care of itself.

  13. The frugality on the economy has been ruined over by the opportunist. Maybe the best thing to achieve and preserve it is to eliminate those bad disruptive people who uses this to their personal interests.

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