EC103-Topic#4: New Frugality, Multipliers, and the Paradox of Thrift

Time magazine’s front cover proposed the idea of a “New Frugality” in the United States. Time has also talked about how the “Great Recession” is impacting individual people. Anecdotal evidence on people is shown as evidence of how people are coping with this recession. It is interesting to note that in 1973 Time ran a similar story about the New Frugality during that period (Notice that this article quotes Alan Greenspan and Arthur Okun).

Richard Clarida is an influential economist who questions the multiplier effect that we typically learn is attached to additional government spending (also cited by Tyler Cowen).

The paradox of thrift might be playing a role in this all as people are deciding to save more even when their wealth or income might not be rising.

Questions you might try to answer:

  • Do you think that there is a “New Frugality” or is this simply a change in current behavior due to the present economic conditions?
  • Do you believe that Americans will return to their free-spending credit driven consumption in the near future when this crisis subsides?
  • What role do you believe the “Paradox of Thrift” is playing in the current economic crisis?
  • Do you believe that these issues of frugality and increased savings has an impact on the ‘multiplier effect’ that is a key behind Keynesian stimulus plans?

I would like your statements to be as subjective as possible, or in jargon terms, positive and not normative in nature. Also, remember, I want you to keep your descriptions short, basic, and related to classroom content. Read other students comments before posting, and please leave your name with your posting.

29 thoughts on “EC103-Topic#4: New Frugality, Multipliers, and the Paradox of Thrift”

  1. Although “most say they will continue their new frugal habits [after the recession],” it seems unlikely that there is a ‘New Frugality’ rather than a temporary change in current behavior (4). First, Americans are a historically luxurious people. Recessions and frugality continually end and begin with rampant consumerism. Gibbs cites it as a reason for the current recession (3); the 1973 Times article attributes some of the contemporaneous recession to “the nation…living beyond its means” (5); even the Great Depression did not stall overspending for long. For whatever reason, economic tribulations fail to have an enduring influence over Americans, perhaps because “where we wind up matters more than how we got there,” but it seems true that only economic pandemics rouse awareness (3). Further, government spending as we are seeing now invites moral hazard. While expected tax cuts may not persuade someone to purchase a new car, they could prevent an ideology of frugality. To what extent moral hazard may be an issue on a private level is unclear, but that government spending “could obscure the need for big changes in behavior” is a valid fear (2). The paradox of thrift does seem to be affecting the immediate economy. Both private savings and bank stinginess are dampening the effect of multipliers (1), but “virtually all economists agree that there is no paradox of thrift in the long run” (2). When negative effects of saving are negligible, enthusiasm for canceling vacations dwindles. In essence, factors in favor of short term frugality seem to vastly outweigh those for long term frugality.1. Clarida, Richard. “A Lot of Bucks, But How Much Bang?” PIMCO. March, 2009. < http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+ Perspectives+March+2009+Clarida+A+Lot+of+Bucks+How+Much+Bang.htm >2. Fox, Justin. “Resolving the Paradox of Thrift.” Time, February 12, 2009. < http://www.time.com/time/magazine/article/0,9171,1879195,00.html >3. Gibbs, Nancy. “The Great Recession: America Becomes Thrift Nation.” Time, April 15, 2009 < http://www.time.com/time/nation/article/0,8599,1891527,00.html >4. Stengel, Richard. “American Thrift.” Time, April 16, 2009 < http://www.time.com/time/magazine/article/0,9171,1891752,00.html >5. “Time for a New Frugality.” Time, October 15, 1973 < http://www.time.com/time/magazine/article/0,9171,910813-2,00.html >-Ross Jaffe

  2. I believe that the “new frugality” discussed in the Time magazine article is simply a change in current behavior which is a direct result of the recession. To some extent, I feel that people will learn to avoid the ridiculous spending of the 80’s and 90’s that put us in our current predicament; however, once the economy rights itself, people will surely begin to consume more once again. Hopefully the financial institutions have learned that credit should not be given away so easily and will loan money more responsibly. Meanwhile, the government is spending massive amounts of money, which brings us to the concept of moral hazard. Current government spending “could obscure the need for big changes in behavior” (“Resolving the Paradox of Thrift”), and lead to another major recession in the future. The “paradox of thrift” is showing slight effects on certain segments of the economy, but these effects probably won’t be felt in the long run, as the unwillingness of banks to loan money is easing the effect of multipliers.Sources:Clarida, Richard. “A Lot of Bucks, But How Much Bang?” PIMCO. March, 2009.
< http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+ Perspectives+March+2009+Clarida+A+Lot+of+Bucks+How+Much+Bang.htm >Stengel, Richard. “American Thrift.” Time, April 16, 2009 
< http://www.time.com/time/magazine/article/0,9171,1891752,00.html >Time for a New Frugality.” Time, October 15, 1973 
< http://www.time.com/time/magazine/article/0,9171,910813-2,00.html >
-Chris Barach

  3. American’s today, much like during the great depression and other major recessions, are moving away from excess spending towards saving and thrift. This brings about the question of whether or not this type of new American spending will outlast the recession. Thus far in American history, during a recession Americans frugally spend, but shortly following the recession most Americans go back to their prior overindulgence mindset. For example, last year when gas prices rose, the number of SUV’s sold drastically decreased, but when prices reached equilibrium around 2 dollars, the number of SUV’s sold again rose to numbers almost comparable to those before the drastic price increase. On the other hand, the great depression, America’s most devastating and closely linked recession, did create a generation of cautious spender, however, the following generation again overindulged and overspent. I believe that those in their mid-twenties to late thirties will, like the generation of the depression, spend less and in smarter ways. However, those generations following have not directly felt the recession in the same ways which I think will lead to the rebirth of traditional American spending ideals, causing these new restraints on spending to once again disappear until the next recession. According to history it would be hard to argue that American’s mind set regarding spending will last well beyond the end of the current recession. 1. Dewan, S. “Consumers Tone Down Consumption.” Huffington Post. March 10, 2009. http://www.huffingtonpost.com/2009/03/10/the-new-frugality-even-we_n_173382.html 2. Hamm, S. “The New Age of Frugality.” BusinessWeek. October 9, 2009. http://www.businessweek.com/magazine/content/08_42/b4104054847273.htm 3. Stengel, Richard. “American Thrift.” Time, April 16, 2009 http://www.time.com/time/magazine/article/0,9171,1891752,00.html-Anna Rivkin

  4. I recently just finished a research paper on the affects of materialism and wealth on happiness for my psych of well-being class. The constant theme that I found was that you can’t buy happiness. Wealth and materialism have, in fact, a negative affect on happiness, bringing forth insecurities and a low self-image. Therefore, the economic crisis that we are currently facing is helping individuals realize that they can still live a happy life but on a more budgeted income. In fact, over a 1/3 of people surveyed stated that “they are spending more time with family and friends” and, additionally, people reported that “their relations with their kids have gotten better during this crisis” (Gibbs, 2009). I don’t necessarily believe that there is a “New Frugality” but I do believe that the crisis will make people more aware of their spending habits. 61 percent of people surveyed in the Times article, stated that they will continue to save more than they did before the crisis (Gibbs, 2009). However, agreeing with what Ross said in the previous blog, America’s culture is a very consumer driven culture and Americans, in general, enjoy purchasing those luxuries products and creating a wealthy image of themselves. I believe that after the economy gains stability again, America will, in the most part, return to their spending habits again but with more of a wary eye. The one main issue that is being confronted in turning the economy around is the idea of the Keynesian multiplier. The idea of the multiplier is that private consumption will be boosted through government spending. During this economic crisis the government spending has been in the form of stimulus packages, including the recent 800 billion dollar stimulus package signed by President Obama, and also through the Fed cutting the federal fund rate drastically (Clarida, 2009). However, in order for the multiplier to be effective, private consumption must increase. Currently, even with boost of the government spending, private consumption has not been significantly boosted. Even with the government urging the public to spend, the holiday sales of 2008 were the worst seen in decades. It was reported that industry sales dropped 2.2 percent (Rosenbloom, 2009). The fact is that no one wants to be out there spending when they are afraid they will not be able to pay off their bills.Even though private consumption has not been boosted yet, I believe that through the government spending money on road construction and other projects that offer jobs to the American people, that spending habits will return eventually. 56 percent of individuals still believe that “America best days are ahead” (Gibbs, 2009). If anything, this crisis could just be an eye opener to individuals that they can still spend but that wealth and materialism is not a major contributor to their happiness. – Caroline Sherman Clarida, R. (2009) “A Lot of Bucks, But How Much Bang?” < http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+ Perspectives+March+2009+Clarida+A+Lot+of+Bucks+How+Much+Bang.htm >Gibbs, N. (2009) “The Great Recession: America Becomes Thrift Nation.” < http://www.time.com/time/nation/article/0,8599,1891527,00.html > Rosenbloom, S. (2009) “After Weak Holiday Sales, Retailers Prepare for Even Worse” http://www.nytimes.com/2009/01/09/business/economy/09shop.html

  5. Money “does not buy happiness;” however I firmly believe that as long as America operates under this system of “western capitalism” where too much is never enough, there will be no end to people’s unlimited desire for money and material goods (Gibbs). There is a definitely a percentage of responsible consumers who will always be careful with their finances, and who will absolutely continue to spend but who also understand that quantity, or having something that is financially out of reach, does not equal happiness. The general American spending mindset will make this frugality temporary for many Americans who thrive on consumption. Enlightenment philosopher John Locke points to spoilage as the ceiling for human greed (you do not take more than you can use of anything that can spoil, like when buying fruit at the grocery store). Spoilage is natural frugality. However, currency does not spoil, and therefore people demand more and more of it. This unlimited greed has caused such events such as the burst of the most recent housing bubble, with lenders giving out sub-prime mortgages to those who did not qualify to make more money. But honestly, who wants more money than could ever be spent in more than one lifetime? Would you buy more cars than you will ever be able to drive, more season tickets to games than you will be able to attend, and more houses than you could ever live in? You would never be able to enjoy what you have if you have too much, and cannot get to all of it. More realistically, on the smallest micro level, why would someone buy a house they knew they could never afford? Better to have and enjoy what you can afford than trying to get more than you can enjoy or afford. I mean, what ever happened to “don't spend more than you make” and “don't buy things you don't need?” (Fox). Unfortunately, many people want more quantity, or just more than they can pay for despite the irrationality in the fact that they would not get to enjoy it because they would never get around to it, or because they would have to be in deep debt to own it. Ironically, this new frugal spending is “driving the U.S. and global economies downward,” in fact making us less wealthy (Fox). This paradox will seemingly work itself out in the long run, as savings will ultimately stimulate investment (Fox). Frugality “is its own reward. Just not right this second” (Fox). It seems to me that Americans need to take on a new understanding of spending and saving, where people buy what they want only to the point that they can really afford it. The government cannot be responsible for monitoring everybody: People must monitor themselves by not spending to a point of credit card debt or by taking unnecessary risk. The government can do its best to watch and regulate the banking system, but on a micro level it is up to every individual consumer. We must enter an era of responsible consumption and savings. There is more to life than unlimited consumption.When did the “American Dream” become about making as much as you can as quickly as you can, or about careless spending on borrowed money? I thought it was about a healthy family with money and security and happiness, not gathering debt because of the need to have material luxuries. The “American Dream” has been distorted by our unlimited system; many Americans will certainly continue their free-spending credit driven consumption when the economy begins to turn around. Spending is necessary in our economy, and everybody does it and enjoys it. It is wonderful that we live in a society where we work for our money and can do what we want to with it. I like shopping as much as the next person. I just wonder if enough people know when enough is enough, when to stop spending instead of racking up hundreds and even thousands of dollars in credit card debt, or trying to make more and more money by taking risks lending money to people they know cannot pay it back. Unfortunately in these tough economic times, any spending is difficult, and many people like couple Barbara and Kevin Lowe can barley make ends meet even with their new frugal spending ways (Strong). We must find a way to start smart spending, and getting our economy going again. Unfortunately, based on the fact that Time Magazine ran a similar frugality article in 1973, I would say that this cycle of boom and bust due to the American lifestyle of boundless spending over smart spending is destined to continue. Fox, Justin. “Resolving the Paradox of Thrift.” Time, February 12, 2009.< http://www.time.com/time/magazine/article/0,9171,1879195,00.html >Gibbs, N. (2009) “The Great Recession: America Becomes Thrift Nation.”< http://www.time.com/time/nation/article/0,8599,1891527,00.html >Locke, John. Two Treatises of Government. New York: Cambridge University Press, 2005.Strong, Chris. "The Unemployed Couple." Time Magazine. 15 April 2009. http://www.time.com/time/specials/packages/article/0,28804,1891475_1891477,00.html-Leo Cancelmo

  6. With the recent recession many are wondering how consumers will respond in the future. Will we save in fear of another economic crisis or will we spend like we did in recent years and help build our credit system. It’s clear for a while people are going to save and I think that big reason for this is the media. One difference between now and say 15-20 years ago is the amount of power the media has. Media sources such as the news, newspapers, and daytime television shows have scared consumers to prohibit their spending. An example of this is CSNBC and how they publicized a rumor about Bear Sterns in order to get viewership. Whether or not they were right or wrong Bear Sterns stocks began to plummet, which helped tear down the economic system. Another example of the media having a role on the economy and consumer spending are television shows that have been showing viewers several different ways to cut back on spending, while simultaneously showing sob stories of people who have lost everything due to the economy. Media sources like these tend to only show the worst aspects of the economy, which both scares consumers and gives them a false image on the current economic situation. – Fox, Justin. “Resolving the Paradox of Thrift.” Time 2/12/09 Web.26 Apr 2009. http://www.time.com/time/magazine/article/0,9171,1879195,00.html.- Engler, Mark. “American Empire Foreclosed?.” Counter Punch 4/20/09 Web.26 Apr 2009. http://www.counterpunch.org/engler04212009.html- Chantanusornsiri, Wichit. “Too Much Spending?.” Bangkok Post 04/27/09 Web.26 Apr 2009. http://www.bangkokpost.com/business/economics/15741/when-to-pull-back-on-fiscal-stimulus-is-a-critical-question-for-the-current-administration.- Cyrus Park

  7. I cannot say that I have a strong opinion either way on this topic. It is extremely difficult to speculate the future, especially when most of events occurring presently are not present historically. The argument that America is in a boom and bust cycle is one that must be considered valid to a degree. Throughout the history of this country, for many reasons, greed has been an insult leveled at America. If this "greed", which I dont believe it is, then "new frugality" cannot last long. However, if people are wising up to the boom and bust cycle, this could possibly be a change in the American mindset. It is fact that spending, as it should, has decreased since the start of this current recession. But I think that this decrease in spending has been spurred by other factors. Socially, excessive spending has begun to gain a stigma. With the constant criticism of the use of private jets and office renovations, very often the forefront of the news condemns people who spend their money, whether they have it or not. This condemnation is only prolonging the current recession by changing the mindset of potential spenders. This stigma has put a legitimate fear into people living comfortably during this recession. People who still can afford to use private jets have cut that consumption as a precaution. People that have never worried about money are worrying without great reason.Whether new frugality is here or not, this mindset of spending the least amount possible can only push this country into a larger hole. I am not saying, go to Disney World and buy $25 Mickey Mouse ears. However, encouraging regular, necessary spending is something that is missing from this attempt at an economic turnaround. We need people who can spend their money to spend it, instead of hoarding it because of an exaggerated fear. We even need people with very little money to continue to spend it regularly. Without a change in attitude, there will be only slow change in the economy.-RLGibbs, Nancy. “The Great Recession: America Becomes Thrift Nation.” Time, April 15, 2009< http://www.time.com/time/nation/article/0,8599,1891527,00.html >Clarida, Richard. “A Lot of Bucks, But How Much Bang?” PIMCO. March, 2009.< http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+ Perspectives+March+2009+Clarida+A+Lot+of+Bucks+How+Much+Bang.htm >Babej, Michael. "Turning into The Recession Mind-Set" http://www.forbes.com/2008/02/14/unsolicited-advice-recession-oped_meb_0215unsolicited.html

  8. I do not necessarily believe that there is a “new frugality,” but I believe the current thriftiness in the economy is a direct consequence due to the change in existing economic conditions (recession). People do not respect frugality or consider it a virtue anymore (after the great recession and other recessions), or at least not people in a certain portion of society. Instead, they have been depending on materialism. They impress people with what they have, not how they paid for it. This of course explains why people are deeper in debt than ever. They need more things to impress their friends and themselves with. Since history is bound to replicate itself, I would have to agree without regrets with Chris Barach that once the economy gets back on track, people will indisputably begin to consume more once again. According to Thursday Bram, frugality was the only way people got by during the Great Depression (Bram). After America’s financial system gained stability from the great depression, consumers recommenced their old ways of wasteful spending. This evidence from the 1930’s proves that Americans will return to their free-spending credit driven consumption in the near future when this crisis subsides. However, if consumers become thriftier, they consume less at each level of expected income. People are currently consuming less and less causing the economy to shrink. The “Paradox of Thrift” does seem to be mildly affecting the economy. Despite the fact that the “Paradox of Thrift” is currently experienced in the economy, “virtually all economists agree that there is no paradox of thrift in the long run” (Fox).Work Cited(Bram) http://www.wisebread.com/five-frugality-hacks-straight-out-of-the-great-depression(Fox) http://www.time.com/time/magazine/article/0,9171,1879195,00.html

  9. It is undeniable that Americans have changed their spending habits. Due to the current economic situation, people are saving their cash and spending less. If people do use their money it’s primarily to pay off debts and try to dig themselves out of the hole they have suddenly found themselves in (2). As one family from Grand Rapids, Michigan describes in the Time article “The Unemployed Couple,” “You’d be amazed at how you don’t even know where your money goes. It took us a couple of months to get a firm handle on our expenses. There are some things you only pay a few times a year and you forget them, and then they crop up and you don’t have $40 for the water bill or veterinarian.” This is one of the main issues. Americans were so used to spending freely—buying excess goods, which were simply superfluous or flashy—that when their funds largely decreased, they were shocked and anxious. A large part of the American Dream is making it to the top—spending and having a lot of “fine things” are all part of the image—the car, the nice home, the perfect lawn and smiling family. We live in a country of idealists, and our “American Dream” often brings about more negative effects than positive—on both a micro (familial relationships) and macro (socio-economic) level. Isn’t that one of the reasons we are in this mess in the first place? People were buying homes they couldn’t actually afford, just for appearance sake, just to feel a part of a certain extravagant lifestyle. So while this recession may be teaching everyone a lesson that bubbles do burst and debt can be a serious issue, when the economy returns to it’s regular state, Americans will regress into their old habits of trying to outdo their neighbor. This doesn’t mean it will happen immediately, or that everyone will return to these habits, however, many Americans will try to regain their level in the hierarchy, which is such a prevalent part of American culture. For example, many of the older Americans were alive during the Great Depression or had mothers or fathers that lived through it (3). So the idea of a massive recession or bubble bursting is most definitely not new to this nation. We just refuse to learn from past experiences. This is why I am so doubtful that Americans will remain as frugal as they are. When people grow accustomed to a certain lifestyle they try any means to retain that lifestyle.Additionally, some argue that instead of saving, the American people need to be spending their money as a means to stimulate the failing economy. However, many people don’t have the money to spend and people are scared of losing even more. Saving is the natural reaction to such events. Why spend money when you’re losing it? And while saving may seem to be hurting the economy instead of boosting it, in all honesty savings eventually leads to more investment. When people feel safe, they spend. So more savings, leads to more investing, which leads to more money flow within the country. Thus, while savings in the short term seems ineffective, in the long term it will help boost consumer confidence, which in turn will lead to the return to old and indulgent spending habits (4).-Hattie Young(1)”American Thrift — Printout — TIME.” Breaking News, Analysis, Politics, Blogs, News Photos, Video, Tech Reviews – TIME.com. 27 Apr. 2009 http://www.time.com/time/printout/0,8816,1891752,00.html.(2)“The Great Recession: America Becomes Thrift Nation — Printout — TIME.” Breaking News, Analysis, Politics, Blogs, News Photos, Video, Tech Reviews – TIME.com. 27 Apr. 2009 http://www.time.com/time/printout/0,8816,1891527,00.html.(3)“PIMCO – Global Perspectives March 2009 Clarida A Lot of Bucks How Much Bang.” 27 Apr. 2009 http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+Perspectives+March(4)“Resolving the Paradox of Thrift – TIME.” Breaking News, Analysis, Politics, Blogs, News Photos, Video, Tech Reviews – TIME.com. 27 Apr. 2009 http://www.time.com/time/magazine/article/0,9171,1879195,00.html.(5)“The Unemployed Couple – How Americans Spend Now – TIME.” Breaking News, Analysis, Politics, Blogs, News Photos, Video, Tech Reviews – TIME.com. 27 Apr. 2009 http://www.time.com/time/specials/packages/article/0,28804,1891475_1891477,00.html.

  10. This “New Frugality” is just a recent change in behavior due to the times. The president of RSL Strategic Retail Candace Corlett states that, “We’ve just been shopping until we drop and consuming and buying it all, and replenishing before things wear out. People are learning again to say ‘No, not today.'” After a few years after this recession Americans will probably go right back to enjoying their lives of luxury (myself included). Just like at the end of WWII and the Great Depression ended we will not learn our lesson. Americans will eventually return to shopping till dropping simply because we will have the ability to. Nothing is more tempting than to spend your credit on something you really want, we may remain careful for a while but if economic normalcy returns so will the habits that die hard.The “paradox shift” in which there is a major decrease in spending in order to save for the future is not exactly helping the cause to “fix” the economy, but “virtually all economists agree that there is no paradox of thrift in the long run.” This frugality and increased savings are having a negative impact on the Keynasian multipliers but as trust is regained and spending comes to rise again it should pass in a few years. It seems that everything is pointing toward a short term frugality, paradox shift, and damper on the multiplier in my eyes.http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2008/11/19/national/a114211S67.DTLhttp://www.time.com/time/magazine/article/0,9171,1879195,00.htmlhttp://www.time.com/time/magazine/article/0,9171,1891752,00.htmlhttp://www.time.com/time/nation/article/0,8599,1891527,00.htmlBy, Xavier Richards

  11. Due to the economic slowdown, people have become thrifty and changed their spending habits in order to save money. The same thing happened during the Great Depression. Spending, after the Great Depression, eventually increased again, but people are wondering if it will again after this recession, calling this the New Frugality. I do not necessarily believe in a new frugality, people are going to start spending their money again, but I think that consumers will spend differently after this recession. I think the difference now is that people we want be more responsible. Right now, our culture is trying to become more respectful to themselves and the earth by creating healthier, less wasteful lifestyles. So even though people will start consuming more, I think that the recession will cause people to think more about their spending and really think about what they are consuming. People are going to continue to spend more consciously and not just buy things to buy them. Consumption, in my opinion, will be smarter, and consumers will start buying more things that have value. For example, hybrid cars will be bought instead of SUVs, because it is smarter both economically and environmentally. This recession has really taught people how to look at the worth and importance a product has before a purchasing it. I think that this change in consuming is what will stick with consumer after the recession. People will save money on important things, and keep habits like turning off their lights, which helps a cause, and spend more money on things that will be beneficial, like healthier organic foods. Before the recession, many people freely spent their money with out thinking about it, and I think now people will be more sensible about what they buy to make their consumption more valuable and meaningful. -Alexandra FresneDemos, Telis. “Thrifty is the new frugal.” CNNMoney.com. 20 Apr. 2009. 22 Apr. 2009 http://cnnmoney.mobi/money/personal_finance/personal_finance/detail/140563/full;jsessionid=C1DA095E7C8EFF93035B46F8289D5A17#p1.Gibbs, Nancy. “The Great Recession: America Becomes Thrift Nation.” TIME. 15 Apr. 2009. 22 Apr. 2009 http://www.time.com/time/nation/article/0,8599,1891527,00.html.

  12. Zoe KatzenCurrently we are in an international paradox of thrift. Paradox of thrift is a Keynesian theory in which desired saving exceeds the amount businesses are willing to invest, (Krugman) which has worsened the global recession. Therefore as consumers change their spending habits to increase their personal savings during the recession, they actually are worsening the global economy. This is a very challenging problem, because in order for the government to fix this issue, they need to change the mindsets of American consumers. In 2001 President Bush urged consumers to spend, which actually lessened the severity of the recession. However, the after math was savings rates of less than 1% and millions of Americans buying things that they could not afford. (Fox) Keynes argues that it was the roll of the government to correct the paradox of thrift, because what was in the best interest of the individual was worse for the economy. (Schifferes) Another major reason why the government needs to get involved, is because as British economic journalist Steve Schifferes points out, there is the threat of deflation, and if consumers expect price levels to drop further, they will continue to save their money until prices levels decrease. (Schifferes) Fox, Justin. “Resolving the Paradox of Thrift.” Time Business and Tech. 12 Feb. 2009. Time. 27 Apr. 2009.Krugman, Paul. “Revenge of the Glut.” NYtimes.com. 1 Mar. 2009. New York Times. 27 Apr. 2009.Schieffers, Steve. “The paradox of thrift.” BBC. 24 Nov. 2008. BBC. 27 Apr. 2009.

  13. I think there’s a change in current behavior due to the present economic conditions. I believe that Americans will return to their free-spending credit driven consumption in the near future when this crisis subsides. This statement is true because the culture of the United States is to consume and spend. The “paradox of thrift,” a term credited to John Maynard Keynes although he never used the phrase, is in fruition. This phrase, as economist Paul McCulley explains, means that if we are all individually cutting our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income—the fountain from which savings flow. I think these issues of frugality and increased savings do have an impact on the ‘multiplier effect’ because the more the government spends, the more the consumption spending should be, but it isn’t, so this is hurting the economy. Consumer spending helps to stimulate the economy, so this needs to increase in order for this country to overcome the paradox of thrift and this disconcerting recession. -Zach BrownFox, Justin. “Resolving the Paradox of Thrift.” http://www.time.com/time/magazine/article/0,9171,1879195,00.html

  14. This “new frugality” will not last. According to Time magazine, 57% of Americans believe the American dream will be harder to achieve but 56% believe the United States best days are still ahead. Being frugal goes against America’s culture, even when people’s financial means is reduced they still believe they will be successful in the future. One only has to look at the media which caters to peoples desires. Kids are watching their MTV and spending all day watching shows that display rich people spending money. In the Time magazine’s survey, people might believe the American dream is harder to achieve but by no means will this be a lasting deterrent from obtaining more material wealth. Perhaps if the government really wants to gain control of the economy it should worry less about raising and lowering interest rates and just take control of the news networks temporarily. Due to a series of troubling news ranging from war to poisonous peanut butter 43% of people are watching the news even more. Also despite there not being an increase in violence, this climate of fear has caused an increase and guns sales and a shortage of ammunition. While most people are acting responsible and holding on to their money, the government needs to scare the population into spending more in order to fix the economy. The once the economy beings to right itself the government should reel back that fear so people begin spending responsibly again. by Costa KensingtonFox, Justin. “Resolving the Paradox of Thrift – TIME.” TIME.com. 27 Apr. 2009 http://www.time.com/time/magazine/article/0,9171,1879195,00.htmlGibbs, Nancy. “The Great Recession: America Becomes Thrift Nation – TIME.” TIME.com. 27 Apr. 2009 http://www.time.com/time/nation/article/0,8599,1891527,00.html.Stengel, Richard. “American Thrift – TIME.” TIME.com. 27 Apr. 2009 http://www.time.com/time/magazine/article/0,9171,1891752,00.html.

  15. While it may seem there is an “increased frugality” judging by the decreased spending of most Americans, this can largely be attributed to the state of the current economy. The ‘New Frugality,’ as written about by Time Magazine, suggests that Americans will have adopted a new style of spending (or saving). This is likely a temporary phase in the economy of the United States, and as such spending will probably return to normal once the economy has done so as well. As stated by the article itself, “56% of Americans feel that the country’s best days are still ahead.” Americans have always been susceptible to such sociological and economic phenomena as conspicuous consumption, among others. From this it can be concluded that although many say they will keep up their new frugal habits once we come out of this recession (1), American frivolity will likely take control once more as people forget about tough economic times. I feel that the paradox of thrift is largely the cause of the current status of the economy. A downfall begins with several companies struggling, which alarms the American public that a recession of some sort may be coming. As a result of this, most citizens begin saving more and more of their money, which in turn causes others to have less money as well. This inevitably leads to what is called the paradox of thrift, which I feel is largely the cause of the state of the modern economy.1. Stengel, Richard. “American Thrift.” Time, April 16, 2009 http://www.time.com/time/magazine/article/0,9171,1891752,00.html2. Gibbs, Nancy. “The Great Recession: America Becomes Thrift Nation.” Time, April 15, 2009 http://www.time.com/time/magazine/article/0,9171,1879195,00.html- Steve Merberg

  16. What is being called “New Frugality” is a trend of fear and distrust in the government and the economy, for good cause. I would like to think optimistically about the American people and say that this is a “new frugality” that is here to stay, that people have learned their lesson and Americans now and forevermore will save and be thrifty, but as history has proven and statistics show, this “new frugality” is much more likely to be a reaction to the downturn in the economy, not a new cultural and social norm. Our culture and way of life over the course of decades has been materialistic and revolved around getting and obtaining luxury.Because this outlook is built into the culture, most are probably unwilling to change these socio-cultural habits. What is ironic, and noted as paradoxical in the Times article “Resolving the Paradox of Thrift” is that it is this “new frugality” and “thriftiness” toward personal savings that is now driving the economy further down the tubes because of a lack of stimulus toward the economic market. Even as the government and the Fed continue to try to stimulate the market, it is people’s unwillingness and fear in both spending and investing that is creating somewhat of a stand-still even after the government has put into effect programs and projects such as TALF, trying to strengthen people’s faith in the future of the American economy. This “Paradox of Thrift” caused by this “new frugality” goes directly against what Keynesian theory says to do, which would be to spend now in a time of downturn and save later when the economy is on the rise. Although many critics are against this government spending as expressed by Blankenhorn’s comment, “If the moral of today’s crisis is ‘Let’s stimulate this and bail out that, and as soon as things get back to normal, we can go back to a debt culture,’ that’s just not a sustainable idea,”at least the government is trying to stimulate the economy in a new way that would seemingly work in the current situation, hopefully leveraging action and mobility within the economic markets. The issue is that this Keynesian suggestion about spending is already hard enough for government and the Fed to put into action, thus even harder for people to put into action, causing this “new frugality” that makes such programs and plans such as the TALF program useless in the long run. Similarly the “multiplier” is directly related to GDP which is directly related to the consumption of households and companies, especially as income increases there would be no doubt that this “new frugality” would have an impact on the “multiplier.” At first the boosting of people’s incomes seemingly would have created an initial stimulus that the government hopes would take hold and stick, causing a long lasting stimulus, but as people became more aware of the economic crisis, households and companies begin to save more and GDP goes down and thus the “multiplier” is affected. In the last blog I find myself, like the general public with little faith in the efforts of the government and the future of our economy, especially as once again the solution lies within something that is a new version of an old idea in combination with some new plan alogether. Additionally, as mentioned by one of my classmates, and I would like to reiterate, it is those who are expected to know best and who are more educated and experienced on the topic that should find this balance and new plans to improve our current crisis. I would like to add that it is also the responsibility of the public to become at least slightly more educated; then their fear and unwillingness to participate in the correction of this issue may subside and a balance might be struck in the relationship between the power of the government and the power of the people. Maybe just maybe with this balance and new faith a cultural change would occur that then would make this “new frugality” an action rather than a reaction.“American Thrift” By Richard Stengelhttp://www.time.com/time/magazine/article/0,9171,1891752,00.html“The Great Recession: America Becomes Thrift Nation” By Nancy Gibbshttp://www.time.com/time/nation/article/0,8599,1891527,00.html“The Unemployed Couple”http://www.time.com/time/specials/packages/article/0,28804,1891475_1891477,00.html“Time for a New Frugality”http://www.time.com/time/magazine/article/0,9171,910813,00.htmlGlobal Perspectives, Richard Clarida, “A lot of Bucks, but How Much Bang?”http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+Perspectives+March+2009+Clarida+A+Lot+of+Bucks+How+Much+Bang.htmMarginal Revolution, “Richard Clarida on multipliers”http://viigo.im/5wl“Resolving the Paradox of Thrift” By Justin Foxhttp://www.time.com/time/magazine/article/0,9171,1879195,00.html-Eve Lewis

  17. The new American Frugality won't be as transient as most of you who previously posted seem to believe. When a man or woman has to make the decision to cut into their retirement fund, or loses their job at no fault of their own, they do not easily forget the change to their lives. Of course American culture will rebound to its spendthrift self that the rest of the world hates, but most of this rebound will come in future generations that hear about hard times as anecdotes from their graying elders. The TIME article shows that a majority of Americans believe that the American Dream will be harder to attain over the next few years. This implies that most people still believe in the American Dream, which is an ideal of excess. This lifestyle of excess is driven by the idea of credit spending and credit will remain a staple of our spendthrift nature. While government spending might be able to increase the GDP of the country, the actual effects of the spending won't necessarily increase the standard of living for the people and increase their confidence in the market, which is the key factor in reviving the economy. Much of that spending goes into military contracts, or the salaries of government workers, or NASA, where there is some effect in the pay of the workers, but little direct influences on the economy. Only spending that gives jobs and affects the environment of the people in general will have the positive influence on the economy that an increase in government spending would be aimed at achieving. The current frugality of America makes it so that the effects of government spending cannot be determined by a multiplier because the different areas of spending produce different effects. The public confidence in the market is so important because of the "paradox of thrift". If everyone is being responsible and saving, the way they feel they should during a declared recession, then the economy as a whole fails. In order to fix this paradox, the people must not be acting like they are suffering from a recession, they need to be up and giving their money to each other. Rooney, Ben. "Consumer confidence plummets." CNN Money.com. 24 February, 2009. CNN. 27 Apr 2009 < http://money.cnn.com/2009/02/24/news/economy/consumer_confidence/ >. Mitchell, Daniell. "The Impact of Government Spending on Economic Growth." The Heritage Foundation. 15 March, 2005. The Heritage Foundation, Leadership Foundation for America. 27 Apr 2009 < http://www.heritage.org/research/budget/bg1831.cfm >.

  18. During the recent economic downturn, there has been a shift in the spending habits of American consumers. Regardless of social or economic class, American citizens are rethinking their spending habits as their confidence in the financial markets continues to plummet. Logically, Americans would rather save more today than revert back to their free spending ways. However, some say that the types of financial decisions that the American people are committing are only a result of the current economic crisis while others say that the crisis is a wakeup call to Americans as they will permanently adopt this new attitude. However if everyone begins to save money and consume less and less, then there is little room for economic growth and thus prolonging the recession. As soon as the economy begins to gradually recover, I believe Americans will undoubtedly and gladly return to their old spending ways. Historically, after the Great Depression for example, Americans tend to revert back to their regular spending habits as our culture is based upon consumerism which is what makes this country run. However, I do believe people will remain conscious and more careful about how and what they spend their money on when making future investments. I also believe that this economic crisis has been a reality check and has made Americans reconsider what items are important for their survival instead of buying unnecessary luxury items. Robert Feliciano Justin Fox: Resolving the Paradox of Thrift http://www.time.com/time/magazine/article/0,9171,1879195,00.htmlNancy Gibbs: The Great Recession, America becomes Thrift Nation http://www.time.com/time/nation/article/0,8599,1891527,00.htmlSteve Hamm: The New Age of Frugality http://www.businessweek.com/magazine/content/08_42/b4104054847273.htm

  19. Anyone who claims that there is a genuine shift in the consumer culture that has become part and parcel of the American dream is hopelessly naive. There is no “new frugality”, and hoping that such a thing would prevail in the wake of our current economic crisis is just not a productive way to look at the situation at hand. Frugality has and will continue to be a fragile state totally contingent upon immediate economic necessity. My prediction is that the financial paranoia that this recession has triggered in our country will last for several years, until levels of saving and spending gradually even out and return to normal. Part of it is that people will realize eventually that this temporary frugality, if it lasts, will be the nail in the coffin that will sink the economy into a deeper recession. Spending is contingent upon the financial well-being and capacity for each individual to spend, understood; however, it is indisputably necessary for the health of the economy as a whole. Paul McCulley explains it this way: “If we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person’s spending is another’s income–the fountain from which savings flow.” Frugality will predominate until people gradually regain the capacity to consume, and once they regain that capacity, they will not only be inclined to do so by the greed ingrained in human nature, but largely because economists will be shouting for them to do so for the country’s sake as a whole. Without a doubt, people will be inclined to be extremely thrifty with their finances in this recession. That is not being contested. But what must be realized is the cyclical nature of that thriftiness–we would be naive to think that the big corporations of the country will have learned the lessons of moral hazard through the subprime mortgage crisis and never make that mistake again, just as we would be naive to think that average Joe wouldn’t jump in the opportunity, in say, seven years, to spend more than he has capacity to for the gratification of immediate pleasures as opposed to long term economic considerations. Look at the country as it was in 1973: “At the height of its biggest boom, the U.S. seems almost to be based on an economy of scarcity. Shortages of an astounding variety of goods—fuel oil, nonferrous metals, wool, copper, cotton denims, vinyl records, plastic bottles, to name a few—are jacking up prices, interfering with production, and in some cases directly threatening American living standards.” The cyclical nature of the economy goes hand in hand with the cyclical nature of each nationwide mindset that each economic state (recession, expansion, middle ground) triggers. That is why I believe this “new frugality” will be shortlived. -Alex KraftStengel, Richard. American Thrift.http://www.time.com/time/magazine/article/0,9171,1891752,00.htmlTime Magazine. Time for a New Frugality.http://www.time.com/time/magazine/article/0,9171,910813-1,00.htmlFox, Justin. Resolving the Paradox of Thrift.http://www.time.com/time/magazine/article/0,9171,1879195,00.htmlGibbs, Nancy. The Great Recession: America Becomes Thrift Nation.http://www.time.com/time/nation/article/0,8599,1891527,00.html

  20. Unlike any other downturns since 1930s, the financial crisis has affected everyone. Because of uncertainty about future disposable income and economic conditions, people are more concern about their spending pattern. Everyone is cutting back on spending, increasing personal saving and paying off debt. Now, the Old New England maxim: “Use it up, Wear it out, Make it do, or Do without” is back into practice. I believe that this is not a “New Frugality” but simply is a change in current behavior due to the present economic conditions. Change in consumers’ behaviors has changed demand for goods and services. However, the “more is better” idea will be back when the economy gets out of recession. For instant, the Times has run an article about “Frugality” during the great depression period; however, when the great depression was over Americans were back into borrowing and spending. Now the frugality is back as a response to the current economic condition. I believe that American will return to their free-spending credit driven consumption in the long run when the crisis is over and the future of economic conditions become more certain. However, in the short run, I believe that majority of people will still continuous the frugal habit because it will make them feel more secure about their financial management in terms of borrowing or saving. Currently, there is a rise in the personal savings rate while nominal personal income declines. The Paradox of Thrift or Paradox of debt has increased marginal propensity to save, and hence decreases marginal propensity to consume. There is a positive relationship between mpc and multiplier. The smaller the mpc is, the smaller the multiplier, and the least the multiplier effects emerges from increase in spending. Consumers are pulling back because they have realized that they are too far in debt. The economy is shrinking because consumers are pulling back. Multiplier effects from government spending and tax cut are smaller as compared to household and investment spending. Hence, getting consumers to spend without over spending or involving in risky debt is a key to Keynesian stimulus plans. —Penhleak Chan—Clarida, Richard. “A Lot of Bucks, But How Much Bang?” PIMCO. March, 2009.http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+ Perspectives+March+2009+Clarida+A+Lot+of+Bucks+How+Much+Bang.htm Fox, Justin. “Resolving the Paradox of Thrift.” Time, February 12, 2009. http://www.time.com/time/magazine/article/0,9171,1879195,00.html Gibbs, Nancy. “The Great Recession: America Becomes Thrift Nation.” Time, April 15, 2009 http://www.time.com/time/nation/article/0,8599,1891527,00.html Stengel, Richard. “American Thrift.” Time, April 16, 2009 http://www.time.com/time/magazine/article/0,9171,1891752,00.html“Time for a New Frugality.” Time, October 15, 1973 http://www.time.com/time/magazine/article/0,9171,910813-2,00.html

  21. Frugality and saving money is a result of the economic recession. Once we pull out of the economic recession people will begin spending a lot more money and no longer be as frugal about spending. However I believe that many people who earn middle or lower incomes will be aware of future possibilities of recession and spend money wiser but only to a certain extent. The U.S. has seen many recessions with similar trends in spending. After the recessions people go back to spending more money on luxuries which will likely happen after this recession. The “Paradox of Thrift” is hurting the economy short-term because as people save money they are spending less which effects another persons income and it becomes a cycling effect. It does however help minimize debts which is better in the longer term. An example of this is in 2001 “President Bush famously urged the American people to get out and shop–and visit Disney World–to thwart the downturn. We did, and the recession was mild. It was followed, though, by an explosion of debt.” (1). Right now the government is providing stimulus plans which are for the most part being saved or used to pay debt. “The 2008 D.C. edition was deemed to be a failure because a big chunk of the rebate checks were saved or used to pay down debt and not spent.” (2). Government spending is creating more financial stability for private spending. Private spending is lagging far behind government spending however eventually private spending will increase as financial stability becomes stronger as a result of government spending.By,John Bienkowski

  22. The paradox of thrift is part of that everlasting Capitalist cycle that makes up the American Economy. Whenever in a recession, American’s always decide to save as to prevent their families from going under. However, it is in this saving that the American economy prevents itself from ever getting back on its feet. During the 2001 recession, Pres. Bush urged Americans to buy, buy, buy. Bush famously told America to “go to Disney World” just to help restart the economy. By having Americans travel within their own country, buying goods, and not saving every last cent, Bush thought that this impetus would help recharge the American economy. He couldn’t have been more wrong. People began buying things, like houses (i.e. the housing bubble), and ended up unable to afford their investments. This incentive to buy all things American took a turn for the worse as citizens began dealing out money for good that they would not be able to repay. By 2005, the savings rate fell to 1% and stayed that way for another two years. The paradox of thrift represents the tragedy of capitalism in America. When people save their money, whether it be for their education or for their homes, there is this question hovering above every dollar they decide to keep in their pocket. By not going out on weekends, they are inhibiting their neighbor’s income. If one does not go out and buy goods from their neighbor, their neighbor will have no income. It is the double-edged sword plaguing America. To save or not to save is that question every American work must ask themselves because if they do go out and buy and support other businesses, they themselves may fall into financial instability. Sources:“Resolving the Paradox of Thrift.”http://www.time.com/time/magazine/article/0,9171,1879195,00.html“American Thrift.”http://www.time.com/time/magazine/article/0,9171,1891752,00.html“The Great Recession: America Becomes Thrift Nation.”http://www.time.com/time/nation/article/0,8599,1891527,00.html-Patrick Clancy

  23. As the financial crisis worsens, many people are focused on the effects of crisis; however few people think about what the world would be like without the financial crisis. My answer to the second question would be that people would continue their former consumption behavior and pursue the American dream. Moreover, the American government would stabilize the economic growth by every possible means. To call current consumer behavior “new frugality” is laughable and contrived. As Nancy Gibbs said in the article “The Great Recession: America Becomes Thrift Nation”, “…sometimes we change because we have no choice…” Therefore, “Frugality” appears as the result of the awareness of people to the present economic conditions. When the financial crisis subsides I believe that Americans will return to their free-spending credit consumption behavior. Even as Americans return to free-spending credit consumption attitude, it doesn’t mean that banks and financial institutions would return to easy credit, the process of making everyone eligible regardless of financial stability. Because free-spending credit consumption behavior works well until banks lower their loan eligibility in order to sell more mortgages and increase credit card use. Even as consumers try to return to their pre-recession spending behavior, improvements in policy and regulation will reform the loaning process in the whole banking system. The financial crisis will hopefully leave an impact on the way that financial institutions operate, and Americans will realize that their consumption method was not perfect.The disturbed economic environment makes people hypersensitive and cautious with their spending behavior. Therefore they cut their spending, and increase their savings for a rainy day, which seems like a smart way to survive a big recession. However, like Paul McCauley said: "If we all individually cut our spending in an attempt to increase individual savings, then our collective savings will paradoxically fall because one person's spending is another's income…". “Paradox of Thrift” is a problem that draws current economy into a deeper recession, raises the unemployment rate, cripples the power of monetary policy and weakens the expectation of stimulus package. The Keynesian theory of Macroeconomics which states Aggregate Demand (AD) is what drives the economy. More specifically, Government can fight recessions using expansionary fiscal policy. By increasing AD, i.e. government spending on projects increases domestic income. Adding in the multiplier effect, the workers will begin to spend their increasing income on goods and services creating more employment. The new jobs created feed more money into the economy. This causes consumer confidence to rise thus people begin to spend more. Virtually all economists agree that there is no paradox of thrift in the long run, therefore issues of frugality and increased savings may affect governmental fiscal policy to stimulate the economy temporarily, but not long term.Gibbs, Nancy. “The Great Recession: America Becomes Thrift Nation” Time, Wednesday, Apr. 15, 2009< http://www.time.com/time/nation/article/0,8599,1891527,00.html >-Haoran Ma

  24. Yasmin HormoziWe live in a highly driven consumerist society where we have been conditioned to buy things we cannot necessarily afford (recently, houses). The “Great Recession “article noted that our society is based of a “consumer culture [that] invites us to want more than we can have” (Gibbs). This lifestyle has caught up with us as individuals, but also for our government, as we all work to pay back debts. Keynesian economics is relevant in our current situation, as the government has to generate spending because individual consumer spending is on a rapid decline. According to Forbes “America’s New Frugality,” consumer spending fell for the “record 6th straight month as households boosted savings” (Serchuk). Although the “drop in personal savings may be considered bad for the economy, it will ultimately be good for the consumer” (Serchuk). Because consumers aren’t used to saving when we have money, there are hopes that this recession will help consumers reevaluate their spending trends. “61% of consumers think they’ll continue to spend less than they did before” (Gibbs). Forbes calls this bit of hope the silver lining because the “savings rate for disposable income fell to virtually zero,” in 2008 so the recession is helping to reverse this trend. Because of this paradox of thrift, it is hard to be optimistic that consumers will continue to save once the economy is back on its feet. According to the paradox of thrift article, “saving stimulates investment,” so hopefully with new trends in consumer behavior, people will begin to invest more once we get out of the recession, and this time they will also save simultaneously. 1. Gibbs, Nancy. “The Great Recession: America Becomes Thrift Nation.” Time, April 15, 2009 http://www.time.com/time/nation/article/0,8599,1891527,00.html 2. Fox, Justin. “Resolving the Paradox of Thrift.” Time, February 12, 2009.http://www.time.com/time/magazine/article/0,9171,1879195,00.html 3. Serchuk, David. “America’s New Frugality.” Forbes, February 17, 2009.http://www.forbes.com/2009/02/16/retailers-bank-stocks-intelligent-investing_0217_retailers.html

  25. The “New Frugality” in the American consumer that is discussed by Richard Stengal is most likely a temporary phenomenon due to the current economic crisis. The Obama administration has been suggesting that the citizenry to save their money since the process began, and since he is so new in office, the people are more inclined to agree with the positions that the administration takes. As mentioned preciously, Americans have a history and reliance upon spending that would be difficult to change. 56% of Americans believe, according to polling cited by Nancy Gibbs, that our best days are still ahead of us. This makes is seem that Americans will be willing to spend their money again once the crisis has passed. However, 57% of Americans, according to the same polling, feel that the county is in a new economic environment. Therefore, what will most likely happen is Americans will begin spending again, but differently. They will take the experience of this current recession and use it to spend their money in different ways, hopefully in better, more stable investments. In terms of the “Paradox of Thrift” described by Justin Fox, I do believe that this had some role in the current recession. The United States has a lot of influence on the world markets and spending patterns around the globe. If Americans stop spending, the rest of the world will as well, which is why the recession had a global nature. In terms of the Keynesian multiplier, this new spending pattern of frugality and increased spending has been having a significant impact. The spending pattern has cause the FED to cut the Federal Funds rate to zero, and to take many other unprecedented actions that would have an impact on the multiplier. However, it can also be determined through these means that the stimulus package that is being implemented by the Obama administration may not be enough to stop the damage. Only time will tell how the current recession will play out. Hopefully, it will all be for the best and America will emerge stronger for it. Stengel, Richard. “American Thrift.” Time, April 16, 2009 http://www.time.com/time/magazine/article/0,9171,1891752,00.html

 Gibbs, Nancy. “The Great Recession: America Becomes Thrift Nation.” Time, April 15, 2009 http://www.time.com/time/magazine/article/0,9171,1879195,00.html
Clarida, Richard. “A Lot of Bucks, But How Much Bang?” PIMCO. March, 2009.
http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+ Perspectives+March+2009+Clarida+A+Lot+of+Bucks+How+Much+Bang.htm 

Fox, Justin. “Resolving the Paradox of Thrift.” Time, February 12, 2009.
http://www.time.com/time/magazine/article/0,9171,1879195,00.html -Joanne Schwartzberg

  26. I firmly believe that there is a “New Frugality” present in today’s American society as a direct result of the current economic crunch and if this recession had not happened the American population would continue with its frivolous ways. The Times article states that most middle class families in the majority of America have started “penny pinching” and being thrift in order to stave off this economic recession. American people by and large are selfish and one of the greatest consumers on earth, this attitude towards money has not only led to a credit crunch, but to what John Maynard Keynes called the paradox of thrift. The paradox of thrift is a theory that if everybody does what is good for themselves the recession will deepen. Since everything is turning sour in the American Economy the population is doing what any normal person would do, as Paul Krugman puts it, “pulling back” from consuming. This “new frugality” is not a fad, not something people will do because it’s a good idea, the population is over saving because they believe they need to in order to survive this recession, it is simply what happens when American people think for themselves, in this case the greatest consumers on earth realized that they might not be able to keep on living at the standard that they were living at currently so they decided to start saving, this may have helped each American out individually, but because of the paradox of thrift the economy is worsening. This deadly cycle will only end when consumers learn the balance between saving and spending, and not spending everything or saving everything. In conclusion I firmly believe that this “new frugality”, the recession, and the paradox of thrift all are connected and related to each other, and in order to treat them all, the population needs to be educated on spending and saving.Works Cited Editor. “Blameworthy: American Consumers.” Time Magazine 00 Jan. 00. Hamm, Steve. “The New Age of Frugality.” Business Week 9 Oct. 2008. Krugman, Paul. “Paradox of Thrift.” Weblog post. New York Times. 3 Feb. 2009. 28 Apr. 2009 . Stengal, Richard. “American Thrift.” Time Magazine 16 Apr. 2009.

  27. If we compare today’s economic climate to situations we have faced in recent history, it becomes immediately apparent that the prevailing “New Frugality” is nothing more than the fleeting result of the recent economic downturn. Time’s 1973 article, “Time for a New Frugality,” highlights the disconcerting parallels between the financial struggle of the seventies and the current economic crisis. Just like today’s crisis, the oil shortage of the seventies had widespread effects. An “astounding variety” of everyday products such as cotton, wool, plastic bottles, and vinyl records saw increases in price (1). Although the financial downturn of the seventies is not identical to one we currently face, the two situations are fundamentally similar—a cataclysmic economic shock created reverberations that affected the lifestyles of every member of the public. And just like today, the response was a normative claim regarding the fundamentals of our behavior: “after decades of congratulating itself on its abundance, the U.S. could use a dose of old-fashioned New England frugality” (3).Yet did we really learn from the crisis of the seventies? The answer is, of course, no. As Nancy Gibbs so eloquently states, “sometimes we change because we have no choice, and since this violates our manifest destiny to do as we please, it may take a while before we notice that those are often the changes we need to make the most” (1). It is in our nature as Americans to want more and more; excess is not merely a byproduct of our lifestyle—it is our presumed right. This is clear when we examine what happened between the seventies and now. There was a gap when we could have learned from our mistakes and slowed down our excessive spending in order to prevent our current credit crisis. But the lesson of frugality does not seem to sustain itself when crises are resolved.Maybe we are “channeling our grandparents” and adopting their saving habits now that economic trouble has hit us full force. The question is, will we continue these habits once the downturn had been ameliorated? Sixty-one percent of Americans say they will “continue to spend less than they did before” (Gibbs 2). Yet this statistic is based on reactions that are spurred by the immediacy of the crisis—they do not truly indicate how people will behave in the future. We can learn much more from looking at the past—and our past actions do not bode well for our ability to enact responsible saving as a means of preventing economic crises. All of this raises a larger question about the so-called “Paradox of Thrift,” a phenomenon that holds that if everyone reduces their spending, consumption— “the fountain from which savings flow”—will slow to a trickle, causing collective savings to drop (Fox 1). It is indeed paradoxical that the actions one takes to reduce his unnecessary individual expenses now may eventually exacerbate his difficulties—yet this is precisely the situation we are in. The economy is in recession largely because the level of consumption has taken a severe hit. Rather than spending their money and contributing to the economy’s revival, however, people are hoarding it in response the bleak economic climate. It is for this reason that Richard Clarida contends that the government’s fiscal stimulus packages will not be effective in resurrecting our economy. The first stimulus went largely towards paying down existing debts and saving; the second is only enough to maintain individual states’ current infrastructure, not create new jobs. Additionally, little of the spending on infrastructure will go into effect until 2010 (1). Although Clarida does acknowledge that the Keynesian multiplier is a legitimate economic effect, he highlights the way in which the multiplier is diminished in the current economic climate. Because our focus is on frugality, the money that pours into private hands goes directly into our savings—the result is “less consumption and smaller multipliers” (2). Thus, the Paradox of Thrift hampers our recovery—the more we save now, the harder it will be to recuperate, in spite of the trillions of dollars the government is pumping into the economy. The Paradox of Thrift highlights the fundamental issue with America’s economic behavior: we spend when we should save, and save when we should spend. We only shun excess after we have felt its effects, then immediately grasp for it again as soon as it is comfortably within our reach. As Justin Fox says, “Frugality is its own reward. Just not right this second” (2). At the end of his article, Clarida suggests how difficult it is for him to remain faithful in the Fed’s ability to resurrect our economy (3). Yet it is not merely the Fed’s responsibility—it is our own; and if we continue with the same vicious cycle of economic behavior that we have practiced for so long, it is indeed a challenge to remain optimistic. “Time for a New Frugality.” Time, October 15, 1973. http://www.time.com/time/magazine/article/0,9171,910813,00.html. Clarida, Richard. “A Lot of Bucks, But How Much Band.” PIMCO, March, 2009. http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+Perspectives+March+200Fox, Justin. “Resolving the Paradox of Thrift.” Time, February 12, 2009. http://www.time.com/time/magazine/article/0,9171,1879195,00.htmlGibbs, Nancy. “The Great Recession: America Becomes Thrift Nation.” Time, April 15, 2009. http://www.time.com/time/nation/article/0,8599,1891527,00.html.Ian Hartman

  28. yinebeb,The current change in consumption is a necessity rather than a choice. Many are forced to limit their spending due the direct effect of the recession while other who are not significantly impacted by the recession are wary of the future and reluctant to spend even if they posses similar financial situation as before the recession. Consumers are changing their attitudes and adapting a simpler life style and trying to save more, they are more reluctant to purchase extravagantly. Shopping was previously a leisure activity, however currently many try to avoid any unnecessary purchases. Most consumers will be more cautious and wary about there credit cards and loans. They will continue their frugal behavior, with huge purchases and loans such as homes and cars, even after the economy improves. However I think that small purchases and spending in leisure, sports, apparel and other similar industries will return to normal after the economy improves. However this change will take a while as it will take time for the shock of recession to diffuse.Although saving is helpful to individuals it is not good for the general population and the state. If everyone continues to save during recession aggregate demand will fall, this will result in the decrease in total savings and hence a fall in investment and economic growth. I don’t believe that the main problem is that people are saving a lot but rather banks are not lending much. People these days, unlike most previous recessions, save their money in banks and hence the direct effect on investment is minimized. Although the Paradox of Thrift might have an impact in general purchasing and consumption its effect on investment should be minimal if the bank could operate normally.The issues of frugality and increased savings impact the money multiplier effect. Monetary policy by the government does not totally hit the intended target as long as people are not willing to consume. The money multiplier does not achieve the intended goal if for every two dollar the government provides 1 is being saved. In order for the money multiplier effect to fully apply the government should be involved in fiscal policy as well. Lauren Young and Burt Helm. “The new age of frugality” Business week ,October 9, 2008Stengel, Richard. “American Thrift.” Time, April 16, 2009Gibbs, N. (2009) “The Great Recession: America Becomes Thrift Nation.”

  29. Even though the frugalness of American spending can be seen in all aspects of consumerism presently, there is no reason to assume the population will continue these habits of saving. According to a poll collected, only 14 percent of individuals feel that we are among the start of a long-term decline.(1) This recession has most likely started a change in current behavior, not started a “New Frugality” of spending. The “Paradox of Thrift” has affected the current economic crisis by increasing shortages in certain markets such as paper, steel, and oil. The reason for this may be price controls, which prevent companies from raising prices as high as the markets anticipate, the controls have also made it impossible for American industrialists to pay the high prices on world markets.(2) Such shortages seem to be a major problem in our economic situation. However, after many decades of spending abundant sums of borrowed money, the increase of frugality for some time my help to prevent waste and conserve energy. Since Time ran the same headline in 1973 it is apparent that this cycle occurred before and rebounded back into the usual tendency to over spend. Some things have changed. For example, it seems as if the media has attracted much more attention from the business world than in the 1970’s. Because of this the government may want to control the messages that panic many investors and consumers, even though controlling the media is risky business. The idea of not spending during a recession is going against Keynesian theory, and the “multiplier” is affected when people begin to save more when they become increasingly aware of economic uncertainty.(3) I believe America’s spending tendencies will resume in due time, when that is, however, depends on the peoples confidence to resume to their old habits. -Derek Sellhausen1. Nancy Gibbs. “The Great Recession: America Becomes Thrift Nation” Wednesday, Apr. 15, 2009<http://www.time.com/time/nation/article/0,85991891527,00.html>2. Richard Stengel “for a New Frugality” Monday, Oct. 15, 1973<http://www.time.com/time/magazine/article/0,9171,1879195,00.html>3. Richard Clarida. “Global Perspectives”. March 2009<http://www.pimco.com/LeftNav/Global+Markets/Global+Perspectives/2009/Global+Perspectives+March+2009+Clarida+A+Lot+of+Bucks+How+Much+Bang.htm&gt;

Leave a Reply

Your email address will not be published. Required fields are marked *