In November I noted how the recession has turned standard economic wisdom on its head, so that formerly good things, such as frugality, are bemoaned, while formerly bad things, such as unconstrained borrowing and spending, are recalled with nostalgia. The New York Times has a good example today, treating an increased saving rate as bad news:
The latest economic data released Monday painted a picture of American consumers and businesses embarking on an era of thrift as the recession deepens, spending less on consumer goods, housing and big-ticket developments like office buildings and hotels.
Americans cut their spending for a sixth month in December and, perhaps more significant, put more into their savings accounts, the government reported Monday, as they worried about losing their jobs and earning less in a deteriorating economy….
"If households are shying away from spending, what's going to cause businesses to start spending again?" a senior economist at Moody's Economy.com, Aaron Smith, said….
"The weakness is feeding on itself," said James O'Sullivan, an economist at UBS. "You've had the spread of weakness from housing to Wall Street to main street. You've got a credit crunch, which is now affecting every part of the economy, including the consumer."
Not until the 11th paragraph are we obliquely reminded that economists used to complain about how terrible Americans were at saving money, preferring instant gratification even when they couldn't afford it, thereby reducing the availability of capital so that the U.S. economy (and government) became dangerously dependent on foreign investors. Ian Shepherdson of High Frequency Economics says the "rise in the saving rate, now at 3.6 percent compared to 0.8 percent in August, is good news in the long run but the key source of pain right now" (emphasis added). Isn't saving always a source of pain (or less pleasure) in the present, for the sake of greater returns in the future? If this tradeoff is "rational" from the perspective of individual consumers responding to current "incentives and conditions," as yet another economist quoted in the final paragraph says it is, can it be irrational when all those individual decisions are combined?
That seems to be the theory underlying the "stimulus" package: We can't depend on consumers to spend money they don't have on stuff they don't need, so the government has to do it for them. Given the incentives and conditions that politicians face, it's more likely that they are trying to mitigate short-term pain (or at least be perceived as doing so), even if that means imposing greater costs on Americans in the long run.
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