Could frugality be bad for the economy?

by Karen on October 9, 2008

While visiting my sister and her family in Seattle over the weekend, I saw an article in the paper that surprised me: Frugal consumers hurt economy, too. In summary, consumers have been spending less all year, but the past two weeks have seen a major drop-off in consumer spending. They’re expecting even less spending in the fourth quarter. Partly to blame, the article says, are fearful consumers. As they spend less, the economy slows even more, leading to a consumer-driven recession.

Is consumer fear and less spending driving this crisis? Maybe so. But I disagree with the reporter’s use of the word “frugal.” To me, frugality is a long term lifestyle, not a temporary reaction to a bad economy. Overall, I can’t see how frugality could be bad for the economy in the long run.

In my short experience with frugal living, I’ve become incredibly empowered when it comes to my financial future. With adequate savings and smart financial choices, I don’t have to let the crazy market dictate my spending. I can take a trip across the country in the middle of this financial chaos, because I know I’ve saved for it.

According to this article, increased spending is better for the economy. But isn’t overspending what got us into this mess? If reduced spending and a slowed economy are caused by fear, then couldn’t you make the argument that if all consumers made smart choices, saved adequately, and spent only what they could afford to spend, then market forces couldn’t lead to a consumer-driven recession? If nobody is financially insecure, then an erratic market wouldn’t have this effect on spending, would it?

I don’t claim to be an economist. I just can’t imagine that the solution to the country’s financial problems is increased spending at retail stores and restaurants. Yes, in the short run the decreased spending is slowing the economy, but in the long run, if we spent less and saved more, wouldn’t that make our economy stronger? It would certainly make us more financially secure.

I also realize that I’m talking about a perfect world here — one that doesn’t exist. The truth is that a lot of people live paycheck to paycheck, and when the market fluctuates like this, they realize that they don’t have enough to cover rising prices or carry them through in the event of a job loss. The consequence is a sudden decrease in spending that is felt throughout the economy.

In my opinion, the article got it wrong. It’s not the people who live frugally and save that hurt the economy. Frugal people are generally pretty secure in their finances, and in my experience their spending remains pretty consistent. They may not spend a lot, but they spend consistently. After all, consistent spending and budgeting are synonymous with frugal living.

It’s financial insecurity that leads to this type of wild fluctuation in the economy, and frugality generally doesn’t equal insecurity.

Am I completely off base here? What do you think?

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An argument for frugality in the face of hard economic times « Living Well on Less
October 12, 2008 at 7:43 pm
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