Are we in the current economic situation because companies, banks, and individuals incurred debt from which they could not possibly recover? Should my students be saving money now? How much is the right percent to save? How can I teach this?
Bruce Damasio responds:
Time magazine had a wonderful article on the
paradox of thrift in the February 23 issue (www.time.com/curiouscapatalist
) that may be of help to you on the issue of saving and spending you raise. As
to part one of your question, you named the participants accurately, the
discussion in the past as now is how much each of them are to blame for this
state of the economy. No consensus exists to whom is truly to blame but the
blame is shared by all. I tell my class we live in a microwave society and
economy of expectations ( I want it NOW ) but reality and the real economy is a
crockpot society in that it takes many things to make it work and it works over
time slowly.
Peggy Pelt responds:
The housing industry is a major contributor. Many subscribed
to the myth that housing values cannot decrease. Standards for making housing
loans became laxer. The resulting housing boom created a big demand. When the
housing "bust" occurred the demand for houses and their value
decreased. People could not sell the houses for what they paid - much less for
a profit. The resulting lay-offs in the construction industry combined with the
losses reported by financial institutions caused consumers to become nervous
about spending, especially on major items such as vehicles. The result is
something of a domino effect.
Regarding saving - there is an economic concept called the "paradox
of thrift." When people save money it comes at the expense of spending. It
increases the likelihood the person will lose his job, have to spend the saved
money, and, therefore, will end up with less money in savings rather than more
-- hence, the "paradox of thrift."
The reality is that people are more inclined to try to save
when they fear the loss of their income - it's a natural "self-protection"
strategy. Financial advisers often advise people to have savings equal to six -
twelve months of income.
David Tucker Responds:
The official line from government economic gurus is that
part of the problem right now is the decline in consumer spending. Personally, it's
all a matter of philosophy. If you believe that the economy will be "fixed"
whenever consumer spending picks back up, then saving may be a bad piece of
advice for students and adults. However, I argue that until capital that is
seized up in unsold real estate starts to correct it, this recession will
continue for a long time. In other words, I always advise my students to save
as much as possible. Let the adults solve their own problems; lets help raise a
generation of fiscally responsible young people. Ten percent is always a safe
and feasible amount.
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