The Spend-Save Paradox

It is no secret that the economy is hurting many people right now. Falling stocks, plummeting home prices, escalating credit card interest rates, disappearing banks, and investment scams have all contributed to a shrinking economy, declining asset values, and a decrease in spending.

One criticism that I commonly hear in the media, particularly among fiscal conservatives like Suze Orman, is that people should have been more frugal or fiscally responsible. Their past greed and lack of pragmatism are responsible for putting their finances in such a dire situation now. People bought too many electronics. They bought cars that were above their income bracket. They were living in houses that had too many bedrooms. They were living on credit cards. They were not living within their means. And of course, they were not putting aside some of their money in savings. Obviously, this is fiscally irresponsible, as I argued almost a year ago. These people, I and other fiscal conservatives would argue, should now be forced to live with the consequences of their actions.

However, it appears that this consumer irresponsibility may have introduced a new problem in light of current sluggish retail sales. These same conservatives who were once telling people they should have saved their money are now telling people they should put this money back into the economy by shopping. Ben Stein, an unabashed fiscal conservative, recently told CNN's Anderson Cooper that consumers should spend money to save the economy. He specifically singled out wealthy consumers and told them to "spend as much as they can without endangering their financial future." He also noted that the top 20% of income earners are responsible for a disproportionate amount of consumer spending and that increased spending on their behalf would be a better boost for the economy than public works projects, which President-elect Obama proposes.

And therein lies the paradox. If consumers are supposed to practice frugality, rein in spending, and put more money into savings, then how can they be advised to go shopping?

Not spending as much money in shopping malls and car showrooms or using your money to pay down existing debt seems fiscally responsible. So many families don't have several months' worth of living expenses saved in the bank to serve as an emergency reserve fund. But in these tough economic times, it seems that this prudence which was once a virtue is now also a vice.

So are consumers supposed to listen to Suze Orman or Ben Stein?

Wealthy people become wealthy by making good investment decisions and by not making unnecessary purchases. If they were hesitant to go shopping in good economic times, it would seem that they'd be even more hesitant to go shopping in troubled economic times. It would also seem that they'd be more likely to protect their money by placing it in money market accounts, CDs, and commodities.

Secondly, conservatives commonly say that it is the wealthy who create jobs. This is the trickle down Reaganomics theory of economic vitality. A rich person buys a yacht. That yacht purchase keeps the shipbuilders, lumberjacks, distributors, textile workers, and marina staff in business. Also, conservatives argue, the wealthy are able to use their financial resources to hire new workers or pay their current workers better salaries. (Hence the mantra of tax cuts.) But if these wealthy consumers go out and spend their money, will they have any money left to hire anyone if they have any businesses of their own? What if the businesses that receive this money from increased spending use it to pay down debt or provide bonuses to top executives instead of hiring new workers?

There is no rule that says wealthy people, consumers, or businesses have to use their money in a specific way. After all, it is common for conservatives to complain that they don't want the government telling people what to do. But why should they listen to Ben Stein? Consumers and businesses should be free to spend and save as they see fit. However, we are currently witnessing the consequences of this hands-off approach to the economy, and a lot of innocent and responsible people are getting soaked because of it.

President-elect Barack Obama is advocating a public works program that invests heavily in improving the nation's transportation infrastructure and making buildings more energy efficient. This plan has come under criticism from Republicans who are suddenly interested in curbing spending and reducing the influence of government. Of course, the federal deficit and the size of the federal government ballooned under their watch and the lack of government intervention was a key factor leading to the current economic crisis.

Despite these criticisms, perhaps Obama's public works program should be given a chance. In addition to creating construction and manufacturing jobs, the public as a whole would be able to see tangible benefits from these investments. Everybody uses roads, bridges, and tunnels. Everybody can see solar panels being installed on top of buildings. Construction and manufacturing jobs would be created, people's quality of life would improve, money could be saved through energy efficiency, and seeing people working could have a positive psychological impact on people who believe their communities are dying and that jobs are nowhere to be found.

The public as a whole could also benefit from increased consumer spending (as Ben Stein advocates), but the difference between Obama's idea and Stein's idea is that the former is a mandate while the latter leaves it up to private individuals to decide what's best.

Of course, this combination of laissez faire capitalism and unrestricted individualism led to the failures of AIG, Citibank, Lehman Brothers, and the Big 3 automakers. Even after passing a $700 billion economic bailout bill last fall, some of these companies either can't say or won't say how this money was spent. AIG executives have been spending bailout money at lavish resorts. So much for letting individuals decide what's best.

In light of this, perhaps by virtue of the Democrats' victories in 2006 and 2008, voters are looking for more government-based solutions to our nation's problems. This doesn't mean that the government has all the answers, but it does signify a greater openness to having a more active and more interventionist government than what has existed over the past few years.

As for the importance of spending vs. the importance of saving, this illustrates the conflict that exists between the individual and the community. Even though the United States has an individualistic society, economic events over the past few months or so show that we are all in this together and that we should find ways to collectively address our economic problems.