Tuesday, February 10, 2009

Spending And Saving

This article on the paradox of thrift is wonderfully jargon-free and a pleasure to read just for that. Mathew Yglesias makes his case about how everyone becoming thrifty and building a cushion can actually hurt the very cushion that folks are building :

The result of this is an overall fall in the average level of income. And that means that even with the share of income being saved going up, the actual level of savings can be going down and we can truly end up in the toilet.

Having grown up in India when it was a still a middle-class virtue to squirrel away as much as possible for the future, I think Yglesias does not give thrift the credit it deserves. Our parents and grandparents saved everything they possibly could for all their working years. For them, no luxury was too small to give up, no indulgence indeferrable. They spent the best part of their lives building this cushion on which to rest on comfortably in their old age. With inflation constantly on the rise, the size of this magic cushion grew constantly and often seemed like an impossible goal to achieve. Yet they soldiered on.

Today, many of those once struggling parents and grand-parents have moved up high enough on the socio-economic scale to be counted among the affluent. They have few if any responsibilities and more money than they have the capacity or desire to spend. A lot of this money is being plowed back into the economy, because there are only so many life insurances and savings accounts anyone can have.

These stolid, middle-class plodders from thirty to sixty years ago have been forced to diversify their investments.Given the size of their financial cushions and freedom from responsibilities, they are able to take the kind of risks they would have found impossible to consider in their younger days.

The process is a slow,long drawn out one but it does work. A culture of thrift will not give the economy a shot in the arm and jump start it; it will more likely make it limp along for many years at the infamous Hindu growth rate before gathering some steam. Ann Petifor offers a counterpoint which I find much easier to agree with. She says :

Commentators like to beat up on ordinary Americans. They're accused of borrowing mindlessly, of greed and materialism. Yet high levels of debt and consumption were not the result of millions of individual decisions by consumers. They were the result of a deliberate economic 'regime change' in the 1970s -- that transformed the US economy, and cut American incomes as a share of GDP.

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