Over the weekend, Kim C. pointed me to an article about the dangers of thrift. There’s been a glut of these pieces lately, most of which just make me tense. They seem as if they’re cheerleading conspicuous consumption. But this one is interesting.
Writing for The New York Times, Hiroko Tabuchi describes what happened when consumers cut back in Japan during that nation’s “lost decade” after its bubble economy burst. Tabuchi writes:
The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japan’s economy.
Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.
I like this story because it’s sober without being alarmist. It’s also interesting because it examines an actual case of consumers reducing their spending and the effects this has on a national economy. The decreased consumption isn’t the only reason for Japan’s economic woes, but it’s certainly a contributing factor.
All the same, I stand by my belief that a return to thrift isn’t a bad thing.
Addendum
In the comments, Elisa from Thrive (an online personal-finance tool) pointed to an article from Flexo at Consumerism Commentary. In “The Paradox of the Paradox of Thrift”, he writes that the recession isn’t caused by a lack of consumer spending, but by a lack of financial lending. Banks are causing this crisis because they’re reluctant to lend money. Flexo’s advice:
Continue to save money and spend less than you earn. It’s not a patriotic duty to spend it on products and services you don’t need, despite what you might hear. There is no need to sacrifice your future financial well-being for the sake of the greater good. It wouldn’t work, anyway. The economy will be sorted out with or without the house you buy now rather than a year from now.
Go read the entire article at Consumerism Commentary.
SEARCH FOR RECENT ARTICLES
http://www.realclearmarkets.com/articles/2009/02/a_dollar_saved_is_not_a_dollar.html
http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0902/document/ec022309.pdf
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I beleive there is a balence we all jsut ahve to find it..
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I read that same article off of fark.com and found it to be enlightening for a possibility, but only that.
However, Wall-street is screaming from their perch like we are in the middle of this recession all because you and I aren’t out buying 60″ LCD tv sets. They need someone to blame and we are next on their list.
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Articles in this vein don’t often seem to discuss the effects on society or the environment. I guess business moguls don’t care so much about those. What happens to society when we stop caring so much about owning things? When we reuse things? When we connect with each other, rather than to businesses, such as via craigslist or Freecycle?
I haven’t done any research or anything, but I know personally it makes me feel warm and fuzzy whenever I make a transaction through craigslist or Freecycle, and know that I am saving something from the landfill, or sending something on to a good home where it will be appreciated. I like how strangers can show up at my door (or me at theirs) and we can each give the other something that we want or need.
And the effects of the above, or wanting to take mass transit instead of a private car, or spending time with your family doing chores that help the family save money? I just think it makes a happy and healthy local community, and it helps keep the world a little greener for our kids. That’s not reflected in consumer spending indices or GDP or export charts.
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Flexo at Consumerism Commentary wrote a piece I love, called “The Paradox of Thrift” (http://www.consumerismcommentary.com/2009/02/16/the-paradox-of-the-paradox-of-thrift/) which wonderfully debunks the myth that debt is your patriotic duty.
But I have to admit that when I first read “the dangers of thrift”, I thought you might be talking about behavioral profiling, as we did in our blog today (http://blog.justthrive.com/2009/02/the-devil-and-behavioral-profiling/)
I am curious how you view this specific aspect of behavioral profiling, because it could definitely hurt the credit ratings of frugal people who are doing the responsible thing and getting their credit under control. People who read this blog are a perfect example of those types who would be unfairly affected.
Do credit agencies and credit card companies have a right to give consumers who shop at thrift stores a lower credit score?
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There is more to life than money and constant economic growth. We should not feel guilty to making do with what we have.
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When companies are laying people off yet crying that people aren’t spending then you’ve found the problem. You as a company can’t put on a hiring/raise freeze (or lay people off) and wish people would buy more of your products/services.
I don’t spend my money *precisely* because my employer put out a raise freeze.
I suspect that a thrifty citizenry would not yield an economy capable of what we’re in. If people are cognizant of their spending and spend wisely then how can you end up where we are? I don’t think you can and, based on that, I’m all for not returning to the *SPEND* *SPEND* ***SPEND*** model.
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I agree with what Colin said above that if we were thrifty to begin with then perhaps we wouldn’t have ended up here in the first place.
Sorry everyone … I’m not going into debt in order to boost the economy
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“The average household spends $514 a year on lotteries,” says Tufano. “That’s more than they spend on dairy products.”
Colin –
I wholeheartedly agree. As a nation, how can we expect people to keep spending while the axe is being lowered on job after job. Obviously this is cyclical reasoning… but it is how everyone thinks.
MLF
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The NY Times article about Japan also pointed out what corporation took during the down times, they never gave back. That’s one thing that concerns me about paycuts, layoffs, etc. Of course, the Japanese consumer has responded by not spending because they fear the shoe could drop at any moment.
I’m concerned about the way U.S. companies are using layoffs as a pre-emptive measure as opposed to waiting until their financial situation warrants it. The more that companies do that, the less American families will spend. Security is one of your basic needs and if a family always feels on the chopping block, they’ll never spend.
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I agree with the 60″ LCD comment (although I do have one 52″). Its ridiculous how it got to the point where the $300 iPod you bought last year isn’t good enough anymore even though it still works, so you went out and bought a $350 model this year which has a touch screen. Big deal, the function is the same. Or you have a pile of $65 video games you haven’t even finished yet (but why not keep replaying them after finishing, and guess what when you get around to them they are probably $20 titles anyway) because your already playing this week’s newly ‘launched’ game. Or theres a pile of clothes with tags still on you haven’t worn yet this season because the sales enticed you with ‘the more you spend, the more you save’ mantra. I really don’t get it. Thats small stuff.
Large items, I don’t get the ‘lease to drive’ mantra for a BMW or Mercedes, where the maintenance services can end up costs just as much or more than a payment. Big deal you get new brakes every 20,000…guess what, brakes are cheap and extremely easy to replace. At least people doing this now are being identified as living beyond their means, whereas before people were in the ‘keeping up with the Joneses’ mentality. We are going through a correction right now, and its going to take a long time. Appreciate what you have.
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Yes, not spending money on goods and services (ie, consumerism) is bad for the economy, since economies are based on spending money on goods and services.
On the other hand, thrift is good for *people*.
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Why has hording taken over the Japanese consumerist? Lack of security. The fear their jobs could be lost at any time. People who are afraid of losing their jobs aren’t going to buy a house, car or any non essential asset.
Housing prices are low, but very few are buying. It’s not solely because the credit market has tightened. EVERYONE I know is afraid of layoffs. No one feels safe.
I would guess that fear is higher in the US because our healthcare is often tied to our employment. The number one fear my friends have about losing their job is how they are going to afford healthcare. That fear trumps everything else.
I think the hording is a common, though. The US went through the same thing after the 1929 stock market crash. My grandma used to talk about how her family refused to buy anything even when things improved because they were scared it would happen again.
Trying to coerce citizen that it’s their ‘patriotic duty’ to spend isn’t going to work. Everyone will be like, ‘Ok. You first.’ Companies need to do what they were supposed to do with their wealth – trickle down. Cut their executive pay/bonuses, hire more employees, spend more on R&D, become responsible to the good of the company and not the self interest of shareholders. It’s the only way.
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I have a bachelor’s in economics so I sort of understand where the economists are coming from. Yes, there does need to be A LOT of spending in order to bring us out of recession. However, the best type of spending the United States can collectively do as a whole is on things that promote long term growth.
Things that promote long term growth include education, basic health care, science research, physical infrastructure (like roads, bridges, highways, public buildings), IT infrastructure (e.g. get broadband out to rural areas), job training for the unemployed and for people in dying industries and so on. Basically, all of the things that we always hear state governments say they don’t have enough money for. Buying cars and iPods and comic books might provide some short term growth, but it won’t have an impact on the long term economy of the United States.
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>>It’s not a patriotic duty
Not at all, but it does show how off keel our current financial system has become: it collapses under its own weight if most people don’t spend almost everything they earn.
All that money is just being funneled away from the majority into the hands of a select few.
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I think you’ve got to admit that thrift is only good for us as long as not everyone does it.
And surely, we’re being thrifty for a reason. There’s gonna come a day when the amount of time we’ve got left, divided by the amount of money we have put aside reaches the ‘sweet spot’ and we can party like it’s 1999, eh?
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The frugal will be paying to get the economy working again, whether they like or not. How? The recently-passed stimulus bill. Americans are rediscovering thrift because it’s the rational thing to do in the face of economic uncertainty. But the stimulus bill is a way to collectively agree to spend money on things that will (hopefully) stimulate the economy like consumer spending does in good times, but while avoiding the problem of relying on consumers to spend in a down economy. But We The People will fund the stimulus with massive amounts of debt, the government pays off its debt by collecting taxes, and even the frugal have to pay taxes.
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The debate over Thrifty vs. Consumption is, I think, somewhat misplaced. That is, I believe that the right place is somewhere in the middle (and I doubt JD or Flexo would disagree) and the real point is about balanced satisfaction – satisfaction for now, and for later.
I told a reporter the other day what I call “The Mustard Story”. Basically, my dad makes homemade sweet-hot mustard that is possible the best condiment on the planet. It is the crack of mustards. I used to just eat it on a spoon. It is the condiment that doesn’t need actual food to go with it.
And every Christmas, my dad gives me a jar of it that is supposed to last me for the year. This little jar of yellow gold. Now a normal, balanced person would treat that jar as special. They would eat it slowly, make it last a month or two, saving it for those really important things, like 2am sandwiches when you’ve just returned home from work on a Tuesday.
But not me. I have three jars on my shelf. Three years without actually eating any of this stuff. Because the mustard is so good, so precious, that I can’t actually convince myself to eat it. It is entirely irrational, but I save that stuff because I don’t want to run out. I deny myself the pleasure it brings simply because I don’t want to suffer the pain of NOT having it.
Folklore and such is full of tales such as these, meant to caution us against hording things imply for the sake of having them. “You can’t take it with you,” they always say. And while I don’t think we’re in any imminent danger of this happening in our culture, I do think we need to adjust our saving message just a little bit. It isn’t just “save for something big”, like a house or your retirement. Because if you do that, then when you get enough for a $200,000 house, you want a $250,000 house. You always want to save just a little bit more, because it becomes so painful to let go of what you have.
Instead, I think the message has to be “save, and spend, for satisfaction”. Hurt a little bit when you’re young, don’t get everything you want, so that you can own a home later on. But equally, don’t starve to do it. Don’t make yourself miserable. Spend the occasional twenty dollars on a really good pizza. Your financial life is like the rest of your life: balance matters.
Great article, JD, and I like the one that Flexo put out as well…at some point, perhaps we can follow-up with an equally thoughtful piece.
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They act like Japan was exactly like the US. Japan didn’t start with a culture where being in debt was considered ok, or with most of the population spending way too much on worthless junk. The US cutting back isn’t a bad thing just because Japan swung the pendulum too far that way. The US is too far the other way.
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I’m not sure why all of you believe economists when they say GDP is an important number. It’s abstract and it’s propaganda. Do what seems right for you and your family and don’t believe anyone who says you need to spend more money every year to make everyone richer. It will make you and most people poorer and a few people richer. Please, don’t believe it.
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It’s true – Japan is still in a financial malaise. But it is not thrift-induced.
Do you know what Japan did in the early 90′s to try to ‘revive’ their economy? They continued to bail out obese, inefficient companies when they should have simply left the markets alone and let the companies (and the markets) take care of the problem.
It’s also eerily similar to the Tariff Acts that triggered The Great Depression.
Thrift is the citizens natural reaction to a crisis. It is also what leads to a eventual correction and a resurgence as poorly run and debt-laden companies fall by the wayside leaving more for the survivors and then things return to normal…if we will let it.
Unfortunately, our government is stubbornly repeating these same mistakes and will likely extend the hard times.
It’s not a thrift problem…it’s an intervention problem.
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I’m with Michael @ #19. When did we start believing that the only way to live is to “grow” our GDP?
The planet isn’t getting bigger even if our waistlines are. At some point we have to stop deluding ourselves into thinking that perpetual growth is even possible, let alone a good thing.
I hope that this “correction” can take us to some type of sustainable economy and culture, and not just be another reason that some people use to justify thier 60″ TVs.
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“The Japan that can say no” is a pretty interesting read. Written by the founder of Sony in the early nineties I believe, it very accurately predicts our current situation and how we arrived here(at least in my opinion).
I don’t believe “thrift” contributed greatly to Japan’s problems in the 90s. I suppose one could interpret things that way, similarly to the way thrift is being blamed for our current situation. I can’t blame anyone for wanting to save now. Turn on the news and what do you see? It’s depressing. Everyone is terrified we are all going to be naked, hungry, and homeless next week. All the more reason to turn off your tv and save on your energy bill.
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Firstly, Savings are good because it allows us to have a buffer. Buffers are necessary. Successful companies have them so that they don’t have to shut down factories just because its an off month. In order to build up a buffer you need to save.
Secondly, This is a correction. We were over-leveraged and too luxury based. People in the industries that were over-leveraged should be laid off. The whole industry needs to shrink. When labor becomes cheaper then other industries will grow to use it.
Thirdly, I don’t think the recession is caused by a lack of lending, it was the lending that got us into this. If they had always lent at this rate the problem wouldn’t have happened.
Economics needs to be looked at from a NET level. Keynes would argue that if everyone spent more than what they have the economy would grow(and for some reason this is good). But everyone would be losing money. That is what has been happening. All the sudden the bill came due and nobody can afford to pay it off.
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Ok, I know this isn’t a political blog, and I certainly don’t want it to become one…however, I do find it a bit odd that the commenters above aren’t willing to go into debt to save the economy (which makes perfect sense), but they are willing to let the government take money from others (or from them if they’re successful enough) to give to companies, thereby “purchasing” their products/services, with no recourse on how to get any of that investment back.
I’m with Curt (commenting above)!
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Well that’s because the Japanese have higher IQ’s. When this over we’ll go back to our old ways
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This subject seems so incredibly obvious to me but here is my take. The reason we are where we are is because the glut of consumerism falsely inflated the economy. We spent, spent, spent until the credit cards were maxed and the banks started to collapse with people who could no longer pay their loans. Then everyone pulls WAAAY back and stops spending (because there is nothing left to spend or we see so many lose everything we stop spending even if we still have our jobs)and the banks stop lending. If we all bought what we need and then bought only a bit of something that is not a need and for the most part put plenty in savings and built up a nice nest egg, when we lost our job or had to move and the house won’t sell, we would have a back up plan with the savings we had accumulated over the years. That way people who had to lose a job would still spend because there would be no fear because they had 6 months or more of money in the bank. That person would still help keep others employed because he had no real reason to drastically cut spending. Instead we use it all up, then expect the banks to keep lending even though no one is repaying their loans because they didn’t have a nest egg to keep up. UGH! I didn’t phrase that well because I am no writer but this bugs the crud out of me.
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I don’t know about the rest of the people here, but in this economy my spending has remained exactly the same. I’ve lost a lot of money, but I haven’t changed my habits.
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“Banks are causing this crisis because they’re reluctant to lend money.”
That’s like saying its all the stock market’s fault for losing value and causing everyone’s 401(k) balances to drop. Banks stop lending because borrowers stopped repaying their debts.
Ultimately, yes, I would say the lending institutions were a key cause, but not because they (prudently) stopped lending to deadbeats. Its their fault because they lend to deadbeats in the first place! They’re just correcting that mistake now.
This “crisis” was caused by the financially immature and their enablers.
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We’ve gotten used to an unnaturally high level of consumption in this country, fueled primarily by debt. There is a sustainable level of consumption that needs to be reached, we’re experiencing the adjustment right now. I think the future is bright provided people save the amount they need to save for their own protection and spend the remainder. I don’t think this downturn will be long enough or strong enough to change our nation’s consumption habits long term. Hopefully people become more aware of the precariousness of their financial position and continue to save a prudent amount. They can go back to spending the rest.
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It is simple macro economics in fact. The less consumers spend the smaller the economy is.
In fact macro-economics said that when GM started shutting down plants that the company would end up in financial trouble.
Although we spend time listening to micro economic geniuses the reality is that macro-economics is always right.
Macro-economics also says that services generate no wealth, the only way to generate wealth is through the extraction or conversion of resources. Service business like the whole finance sector can only re-distribute or preserve wealth they can never generate it.
Why do you think the Chinese are trying to destroy our industry and are we helping them. World domination without firing a shot.
http://www.budgetingsense.com
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I look at this partly from an environmental perspective. We’re getting a crash course on sustainability. Some of us are old hands at it – but other americans haven’t thought or acted this way since The Depression. I am thrilled a lot of chain stores and malls are going under. We had way too many stores per capita, and way too much temptation. Not to mention waste! So if living beneath our means results in a contracted economy, we will all have a lot less money. However, that doesn’t say a thing about our quality of life. It may not be all that effected once people are back working – at green jobs!
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I agree that thrift is ultimately the best thing, though I am often vexed by something.
If I’m supposed to “get rich slowly” in part by investing money in stocks, and if the growth of stocks and of the economy relies on consumerism and its effects, then is it really in our best interest for the public at large to be thrifty?
Perhaps one of the terms of this argument is faulty or incomplete; I sure hope so. Yet I still wonder: what growth in stocks (and similar long-term vehicles) will occur if people reduce consumption? It seems that the success of the market is directly connected to the rise of consumerism, including hyperconsumerism.
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Arguing consumers should rightfully abandon frugality in these times is utterly ridiculous.
I make that statement with the utmost confidence.
DebtFREEk!
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I have yet to see an article address my question on this topic. If consumers (is that all we are these days) are saving more and spending less that should provide more money for banks to lend (assuming consumers are putting their savings into banks and not under the mattress) and help free up the credit markets. So how come the uptick in personal savings isn’t helping the economy?
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JD– There is no need to worry . . . the “newly frugal” will quickly shed their new found frugal ways once the smoke clears and the rest of us will continue to be selective in our spending . . .
I just discussed this here:
http://divorceddadfrugaldad.com/2009/02/18/how-to-become-frugal.aspx
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To Sam
The problem is that the banks aren’t using any extra savings to lend (to customers,companies or even other banks anymore).
To protect themselves from further deteriorations in their “asset” values they are hoarding the money and not lending it out. This means they don’t need to make sell extra shares at a low point in the market nor to cause market panic by asking governments/central banks for extra funds.
Of course when they lend it out it is to the lowest risks and at usurious rates as well. The market is seeing a wholesale revulsion from risk, the problem being that their risk management procedures got them in this mess first.
So just when they most need it, they rely on the discredited system!
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Stephan Karlsson, an economist that follows the Austrian School ideology, has a different take on it.
Check out his Sunday, Feb 22nd post about this article. (Here is a link to his blog http://stefanmikarlsson.blogspot.com/.) He asserts that low consumer spending is a cause of a slow economy, not the other way around. And that Japan has a low savings rate as well. A different point of view that I happen to agree with…
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How is saving money bad for the economy? If more people, businesses and governments saved money instead of borrowed, I’m willing to bet this “credit crunch” wouldn’t be upon us or not near as bad.
Here’s another excellent article from Mises. Even though the title is Economic Recovery Requires Capital Accumulation, Not Government “Stimulus Packages”, it deals with why saving is mandatory for a functional economy. Government Stimulus Packages is the evil, not saving money like the media pushes down our throats.
Please read it. It’s lengthy, but really makes more sense.
http://mises.org/story/3353
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A certain infamous and shameless prime minister (I won’t name him) last xmas told us to Buy prEsents w/o any feaR…
Now he’s heLping (?) oUr national economy by:
- giving 40 (forty) euroS per month to the poorest families: not Cash, mind yOu, but a card that caN be used only In shops of his own group
- urging us to buy decoders to see his digital channels. They even make reports on the tv news (his tv news) about how cheap decoders are in the shops
- offering stimulus to new car buyers
…God help us.
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Ya know, here’s a thought: maybe consumer spending isn’t really meant to be the basis of a national economy. The GNP was never meant to be “retail.”
I’ve enjoyed several economists on Bloomberg in the past few months, talking about how the real problem is that nothing tangible is made in the US anymore. We export credit default swaps instead of desirable products to the rest of the world. We import some huge percentage of what’s sold here from foreign countries.
We need to get back to making tangible goods here in the US instead of outsourcing everything. Then we’d have jobs here, goods here, and goods to sell to the spenders of the entire world.
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It seems to me that we will all have more to spend if we save for those things we’d like rather than borrow to acquire them. If I borrow to buy a bunch of stuff and end up paying twice as much for that stuff because of interest over time, wouldn’t I have more to spend in the long run? I still don’t see how excessive consumer credit helps anyone but the money lenders. If consumer spending is based on credit, it has to collapse in the long run – as it did.
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I think this has already started to happen to some degree. We still spend money on essential goods like food but many businesses are going to see some really tough times ahead. A lot of big retailers in the UK have gone bust due to lack of consumer spending. On the flip side some businesses that sell budget or discounted products are doing really well out of this economic mess.
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I think each of us has the responsibility to get the most for our money. It may not immediately “help” the economy but rampant consumerism is one of the things that got us all into this mess in the first place.
For example , my daughter HAS to have phone, No negotiation there, and I got tired of fighting with her over the high bills.
But I discovered that you can get out of your expensive cellphone contract if the company changes its terms.
When Sprint changed its charges for texting, I called them and was able to cancel the contract!
They won’t tell you, of course. You have to ask!
I turned around and got a pay in advance phone from Net10 and only pay want I can afford up-front and it’s now a part of my daughter’s “allowance” which has turned out to be a very good way to get her into the habit of budgeting.
It may not be a “necessity” to everyone but any way to reduce costs is good to me!
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A good letter to the editor about Japan’s “lost decade” appeared in today’s Times. The writer asked “lost to whom”? And pointed out that practices that have become habitual to Japanese consumers are beneficial to the environment and place those consumers on a much more solid track toward financial independence.
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I think the best advice is do what makes you happy. Living frugally makes me happy. I love being able to be prepared if something was to happen. I love the idea of retiring early and living comfortably but within my means till then. Some people want to ‘live’ and just get instant gratification. “Buy what I want when I want”. If that makes them happy, so be it. I do not want to live that way and will share my experience and advice with anyone that will listen.
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Suze Orman was on CNN recently saying that consumers should ignore those who say that spending will help the economy. Each consumer should focus on improving his or her own financial picture and plan for the possibility of job loss. Inside, I gave a little cheer.
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@Amy
If that is what Suze Orman said, then it is the smartest piece if advice I have every heard her give (I am not a big fan of her’s). My hat’s off to her saying it and to you for sharing it . . .
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More thrift -> more savings -> more tools for production -> more future production -> more future consumption -> better economic situation. This should be obvious to anyone who cares to remove the Keynesian blinders installed on folks by government spending apologists.
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