Is Frugality Bad for the Economy?

IS FRUGALITY BAD FOR THE ECONOMY?

This topic comes up fairly regularly in certain frugal circles I'm in, and there is a fair amount of debate about it. So  this evening when I came across this article in Amy Dacyczyn's book "The Tightwad Gazette II" I was inspired to share.

I'm sort of a politics/economics junkie. Every weeknight I forgo Wheel of Fortune to tune into The MacNeil/Lehrer NewsHour on PBS. The show's format includes a panel of experts on a given topic--who sharply disagree. When the topic is the recession, typically you can see a professor of economics from Harvard Business School duke it out with some guy who won the Nobel Prize for economics.

Though I'm not an "expert," one question I have been asked to comment on it "If I'm frugal, isn't that bad for the economy?"

It's true that plenty of economists believe we need to get that American consumer confident and spending again. This thinking, that we can spend our way to economic prosperity, leads some to believe that those people who don't spend money but save it instead, contributre to recession.

In fact, the reverse is true. Spending too much, and spending badly, got us into this mess. Frugality, in the long run, will get us out.

Here's why:
1. Former senator Paul Tsongas points out that business in America has suffered because of a lack of venture capital. Most businesses need capital to start up or to reinvest for greater productivity. This kind of borrowing is good debt, because in the long run it will create economic surplus.

Currently, there is a shortage of capital for two reasons. First, Americans save very little money, and second, what is available is sucked up by the federal government to pay for overspending. Americans typically save 4 percent of their total income, compared to Germans, who save 10 percent and the Japanese, who save 18 percent.

2. The average American has huge debts. To ask him to spend more to get the economy rolling is silly. It increases his economic vulnerability.

If that American declares bankruptcy, we all pay for it in higher costs from companies that had to eat the loss. If that person goes on public assistance, we all pay for it through higher taxes. And if chicken-hearted politicians are afraid to raise taxes, the government will have to borrow more money and. . . (see point#1).

3. The focus on spending our way to prosperity denies much deeper underlying reasons for the recession, such as the laws that make relocating manufacturing jobs to Mexico attractive for business. Consumer confidence will not bring back the thousands of manufacturing jobs we've lost in the last ten years. More people unemployed means the government pays out more unemployment benefits and--you guessed it--(see point #1).

To claim that we must borrow and spend our way to prosperity is shortsighted. We tried that to recover from the recession of 1982. The short-term economic gain was clear: More money was in circulation, which meant more jobs, and that meant more money, and that meant more jobs.

But that was false "prosperity." The government "created jobs" through military buildup and expanding its own bureaucracy. Developers borrowed money to build office complexes when there was no market for them. Confident consumers bought CD players and snowmobiles on their credit cards. By trying to accelerate a recovery artificially, by going into debt on a government, business, and personal level, we eventually lost economic efficiency, because a larger and larger percentage of our money has had to be siphoned off to pay interest on our debt.

I'm not saying that debt is always bad. But debt must give you value; it has to save you money in the long run.And I'm not saying you should never spend a dime. Clearly, some spending is essential for the economy. We all enjoy a higher standard of living because we understand the benefits of trading goods and services. Imagine if we all grew our own cotton to weave our own material to sew our own clothes. It's more beneficial to trade our labor with those in our economy who have learned to make clothing more efficiently. Even if everyone were a tightwad, there would still be an exchange of goods and services, but this exchange would be sustainable over the long term.

If you're not impressed by economic theory as expressed by a housewife from Leeds, Maine, I refer you to two books that say the same thing about our need to save to rebuild the economy. They are "United We Stand" by Ross Perot and "A Call to Economic Arms" by Paul Tsongas, which is available for a suggested $5 donation from the Tsongas Committee, 20 Park Plaza, Room 230, Boston, MA 02116. By the way, this is not a political endorsement of either of these men.

So don't rationalize spending because it's "good for the economy." And don't feel guilty about being frugal because it's "bada for the economy."

A healthy economy is made up of economically healthy citizens. If you make choices that are financially sound for you, they will probably be financially sound for the economy in the long run.

Another perspective, was given by Mr Money Mustache in his blog post from April 2012 -- http://www.mrmoneymustache.com/2012/04/09/what-if-everyone-became-frugal/

What do you think?