Which Is It: Spend or Save?

BY busadmin  December 19, 2008 at 11:18 AM EDT

Woman shopping; AP photo

Question/Comment: We’re told that lower consumer spending will make economic recovery much more difficult. We’re admonished that we don’t save nearly enough, and are among the lowest among industrialized nations. So which is it: spend or save?

Paul Solman: The proverbial horns of a dilemma, eh? Too true, too true. You can’t BOTH save and spend. Or, as Ben Franklin rightly put it: A penny saved is a not earned [i.e., not spent]. The problem is, we’ve been spending too much, saving too little. As we shift, we hurt. The more we have to shift, the greater the pain. So right now, the government is trying to re-inflate the global economic bubble to lessen the pain to get us spending again. The risk, of course, is even more pain next time around when we stop. (Just think of Alan Greenspan lowering interest rates after the dot com collapse – to re-flate the economy – and what that has helped lead to.)

But here’s a rosier view, from one of the most interesting and thoughtful economists I know, Robert Frank of Cornell. I interviewed him last week for an upcoming story about president-elect Obama’s infrastructure investment initiative, about which Frank was enthusiastic.

At one point I asked: “You have no doubt at all that we’re going to emerge from this greater, stronger?”

Bob Frank: “The long run trajectory of strong growth has not played out. We have to have smarter growth in the future. Obviously, we can’t continue to pump greenhouse gases into the air and poisons into the river but we know how to address those problems. We can adopt carbon taxes and effluent permit laws that really do control the pollution and if you think there aren’t more good ideas out there, well, just look around! There are so many good ideas. Ideas seem to be generated at an increasingly rapid pace in recent years. So the technology is going to make all sorts of things possible in the future that we never even dreamed about.”

Paul Solman: “So you don’t think it could be that this is something that keeps us down? The higher you fly, the further you fall?”

Bob Frank: “No. We’ve borrowed too much money. We need to pay it off, but we don’t need to pay it off this year. The only real uncertainty is whether Congress will act decisively. If they don’t then we’re going to see a long period of stagnation. I worry about that. But with the right action from the government we can short-circuit the pain of that process. We can have this be a painful but short duration episode.”

I also interviewed shoppers for a piece that ran on Dec. 16. Several shoppers said they felt a “patriotic” urge to spend these days, as do I, I might add. In fact, I’m committed to spending at least as much as last year, out of a sense of what you might call civic duty. But then, I’m probably atypical for lots of reasons. My wife and I have saved assiduously over the years and our incomes haven’t been hurt (yet). Were I to lose my job, I’m sure we would be spending less.

You can watch the piece “Restoring Consumer Confidence Proves Tricky Task” below:

Finally, this last exchange with Bob Frank, about personal spending:

Paul Solman: “Are you personally following your prescription for government? That is, are you spending more?”

Bob Frank: “I’m spending about what I normally spend – I’m not cutting back.”

Paul Solman: “Do you think it’s your patriotic duty, and mine, and our viewers to spend at this point?”

Bob Frank: “If there’s something you want anyway and you’d like — you’ve been looking for an excuse to buy it — that’s a great excuse to shake loose a few extra dollars from your account and buy it, yeah. You can say to yourself that if I and others do that the economy will get back on its feet a little more quickly.”