The era of excess may be over as Americans begin to reconsider their notoriously consumptive ways. Recent news reports indicate that consumer spending fell for the sixth month in a row, with yet another decrease revealed in the December 2008 numbers. Personal savings, however, according to a New York Times article published on February 2, 2009, have increased significantly. While this shift in consumer behavior may be a source of concern for those more heavily influenced by Keynesian economic perspectives, for the individual consumer, increasing the rate of personal savings is a smart move in these economically troubled times.
Fueled by credit card debt, home equity borrowing, personal loans, and other means of obtaining credit, consumer debt increased steadily during the past decade, reaching record heights in 2008, passing the $975 billion mark. However, as the overall economic climate began to deteriorate, consumer spending slowed significantly. With about 70 percent of the American economy relying on consumption, this slow-down in spending has been felt throughout, particularly affecting the service industries and retailers. Job losses have been creeping steadily up, as decreased profits force lay-offs, closures, and other cost cutting measures.
That is the basic fear of many of those who adhere to Keynesian economic philosophies that “excessive saving” on the part of the individual is detrimental to the economy as a whole, having the potential to be the source of economic recessions and even depressions. From that perspective, only through spending will the economy continue to grow and flourish and if consumers failed to do their part in stimulating the economy through their spending, then it was the responsibility of the government to spend in their place. Keynes theories were a radical departure from the thrift and frugality that was so much a part the earlier American generation’s financial philosophy.
However, looking at the results of such monetary theories and policies as they have developed through the years under the influence of Keynes and his fiscal philosophies, there are many who would debate the wisdom of casting aside values of thrift, frugality, and saving. The average American is weighed down with an astonishing amount of debt, and, all too often, a significant portion of that debt is high interest debt taken on for non-essential consumer goods, such as home electronics, furnishings, vacations, and eating out. McDonald’s, as was widely noted in the media at the time, became the second largest merchant card processor in 2008.
In addition to high levels of debt, Americans tend to save very little, with rates of savings actually dipping into negative numbers in recent years for periods of time unseen since the Great Depression. And, that is exactly why so many are struggling in today’s more challenging economic circumstances no room for fiscal maneuvering due to being overextended financially and without any real back-up savings. Frugality and thrift, as well as common sense financial practices, would have been a much more secure path for many. As for the economy as a whole, perhaps it, too, would have been better prepared to face the more challenging economic circumstances we see today, had it relied on something a bit more substantial than consumers making poor financial decisions spending money they didn’t have on things they didn’t need.
The Keynesian influenced thinkers are correct, but only in the short-term. If consumers do make a solid shift to spending less and saving more, one that lasts longer than the current phase of fear of what the near economic future holds, it probably will have a negative impact on the economy for a short while. However, that will just be until a more sustainable economic model develops. Over the long-term, such changes will produce a better, stronger economy able to withstand the natural highs and lows that are a part of the economic cycle.