Pay Me Now, or................

[Chicopee John]

To Spend or to Save? Trick Question

by David Leonhardt Wednesday, February 11, 2009 New York Times

 

It’s your fault. Part of it is, anyway. You, the American consumer, spent too much money. You bought too much house, took on too much debt and generally lived beyond your means. Your free-spending ways helped cause the worst financial crisis since the Great Depression.

 

 

And now you’re going to have to do your part to end the crisis. How? By spending. Enough already with the saving that many of you have suddenly begun doing. This very moment, Congress and President Obama are preparing to send you a tax rebate, to inspire you to stimulate the economy. So go out and stimulate. Spend as if the future of your country depended on it.

 

John Maynard Keynes, the great 20th-century economist, would have appreciated the apparent absurdity in these mixed messages. He coined a phrase, “the paradox of thrift,” to point out that what was rational for an individual during hard times — saving money — could be ruinous for an entire economy. Eventually, many of the savers may end up out of work because everyone else is saving, too.

 

It’s enough to make you wonder what exactly you’re supposed to do. At his news conference on Monday night, Mr. Obama was asked directly whether people should spend or save their rebate checks. He ducked the question.

 

Fortunately, though, it has an answer. There are a few ways to help both your own finances and the country’s.

 

 

The first involves figuring out how to spend money now to save money later — which can lift the economy today and help individual households cope with their battered finances in the long run. The second involves realizing that Keynes’s paradox isn’t ironclad. In a financial crisis, when banks may need capital as much as retailers or restaurants need business, many people can save without guilt.

 

What follows is a guide to spending and saving, both sensibly and patriotically.

 

Besides developing the most famous prescription for curing downturns, Keynes can also be considered the godfather of behavioral economics, as the columnist David Ignatius recently wrote. While other economists obsessed over statistical models that treated people as hyperrational automatons, Keynes wrote about “animal spirits.” He helped explain how psychology shaped economics.

 

Psychology-tinged economics — that is, behavioral economics — has taken off over the last two decades, and one of its central findings is that most people do not do a good job of planning for the future. They aren’t nearly as nice to their “future self,” as economists say, as to their “present self.”

 

They eat just one more doughnut and put off exercising until tomorrow and tomorrow and tomorrow. They fail to set aside enough for retirement. Again and again, they choose a bird in the hand — be it dessert, convenience or a little extra cash — over three or four in the bush.

 

These habits end up causing a lot of trouble. But they also present an opportunity in a time like this. Most people could save themselves a good bit of money by giving proper respect to their future self. They could spend a little now and save a lot later.

 

McKinsey & Company recently analyzed household spending on energy, for example, and found enormous waste. People heat their homes when they are not there and, thanks to leaks in their walls and heating ducts, also heat the airspace above their roof.

 

A programmable thermostat, which adjusts the temperature when people are out of the house or asleep, can cost as little as $50. For less than $1,000, people can buy the thermostat, as well as hire a contractor to fix leaks and replace their light bulbs with more efficient ones. In either case, the spending often pays for itself in just a year or two.

 

“There is a difference between consuming and investing,” says Ken Ostrowski of McKinsey. “And energy efficiency falls more into the category of investing.”

 

I asked behavioral economists for some other examples, and they helped me come up with a nice little list. Parents of young children can join Costco and make up their membership fee with just a few months of diaper purchases. Drivers can inflate their tires, change their air and fuel filters and start getting better mileage. Frequent book buyers who don’t mind screen reading can buy the new Kindle. It costs $359, but most new books then cost less than $10.

 

Families who shop at rent-to-own stores, which charge ridiculous interest rates, can temporarily pare back and then buy furniture or electronics outright.

 

People who do a lot of laser printing can purchase a printer that uses only a cent or two of ink per page. (Many use far, far more.)

 

Purified water drinkers can lay off the Aquafina and buy a water filter. Seltzer drinkers can buy a seltzer maker. My wife and I now have one, and it is a beautiful thing indeed.

 

In these cases — and, no doubt, many others — the initial investment tends to pay off quickly, sometimes in mere months. That’s why such spending is perfectly suited to the moment. It will keep people employed or create new jobs when the economy needs the help. But it will also shore up households’ finances.

 

The one big caveat is that some people will feel that they can’t afford to lay out an extra $50 or $100 right now. Millions of workers have already lost their jobs, and many others simply want to cut back. In December, households saved an average of 3.6 percent of their disposable income, up from about 1 percent in recent years.

 

In a normal recession, this new saving would have a lot more downside than upside, just as Keynes explained. But this recession is different. It has been caused by a financial crisis. If Americans don’t get their finances in better shape — if mortgage defaults keep rising and credit card delinquencies soar — banks will remain afraid to lend, and the recession will linger.

 

Even more immediately, banks need to get their own finances in order. That’s the whole aim of the new bailout plan announced by the Treasury Department on Tuesday. Some additional personal savings can only help that effort.

 

“The government is pouring hundreds of billion of dollars into banks,” said Richard Thaler, a University of Chicago economist. “What’s so bad about households pouring some money into banks?”

 

The ideas here don’t apply only to individuals, either. They apply to the stimulus package as well. The federal government is set to spend $800 billion to stimulate the economy. Much of that money will necessarily go to tax rebates, unemployment benefits and other programs without much long-term benefit. But $800 billion is a lot of money. And the best forms of stimulus are the ones that take effect quickly and bring a long-term payoff. That can mean tax credits for home weatherization or money to pay for the installation of computerized medical records — two programs that are still in the stimulus bill.

 

Whenever this recession finally ends, our future selves are going to be facing some very big bills. They can use all the help we can give them.

 

 

 

[choco]

nope...sorry. i didn't lend the money for the poor to buy a house. i have no credit card debt......

 

 

 

im keeping anything that comes my way, cause i'll need it to keep my house later once my company is dissolved.

[DieHardBrownsFan]

Same thing I'm doing. My credit card debt is gone. I have enough to survive when/if the shit hits the fan. I will probably be laid off within the next 12-18 months, maybe even sooner. But I am financially sound.

[Mr. T]

Well, when the money comes around we need to save it because we will all be paying it back ten fold.

 

We didnt start this fire.

[choco]

^exactly.....tax man will be on our doorsteps.

 

 

i hate to be so crass....but giving me a one-time check and telling me to spend it really doesn't do that much. if every man, woman and child in america was given $2000, and spent it, thats still only a 600 Billion dollar injection, spread throughout the economy.

 

its not money where its really needed.....

 

 

 

if you really think about it, this is really our (the people's) only shot to recover some our OUR money that these assholes are wasting. ill be damned if they'll tell me what im going to do with it.

 

 

[Westside Steve]

I haven't carried credit card debt for about twenty years.

 

They are useful if you keep a 0 balance.

 

But they're too easy to get too easy to run up and too easy to default, and that societal trend IMO, is the root of the bad economy and newfound love of Marx..

WSS

[calfoxwc]

We carry that zero balance, and laugh that we never pay interest.

 

I used to be on a charity committee for a medium sized company. Well, we had a hell of a nice budget - nearly half a million bucks

going to all sorts of charities, local and national.

 

Companies are going to stop that completely, pretty quick if Obama carries through with taxing corps to "spread the wealth".

 

My guess is, in all probability, the net gain will be negative, or at best, a wash, except for the companies

cannot adjust contributions based on sales or sales projections, for one example.

 

Those companies already do that, voluntarily.

 

As usual, all too often, liberals emotionally decide a "solution", only to have that solution create a bigger problem(s).

[choco]

if they "fix" the problem, then people wont need their handouts.

 

 

this is just lip service and a smokey guise. its nothing different than before with previous administrations.

 

nice to know the messiah of hope and change decided after the election to tow the party line. nice that we were sold hope and change, and all thats being delivered is fear and dispair.

 

 

 

 

[Mr. T]

Welcome to the nanny State!

 

Cradle to the Grave. why work?

[calfoxwc]

Just bought a new log splitter - 22 ton. Kept somebody in a job.

 

That's more than the Dem controlled Congress has done. I wonder what their approval rating is now?

 

 

 

 

[Kosar_For_President]

Welcome to the nanny State!

 

Cradle to the Grave. why work?

 

We can say the same thing to the CEO's of the major lenders that got us in this mess.