Paradox or not, the party's over

Was it only a year ago that we were tsk-tsking over the fact that Americans’ savings rate had fallen below zero? We were spending more than we made, thanks to home equity loans, credit cards, and our vague notion that everything would work out—it always had.

Now, professional econo-watchers are tsk-tsking over the fact that Americans have snapped their wallets shut. In many cases, the home equity and the credit cards and the feelings of well-being are gone—along with the job. Consumer confidence is at an all-time low, down to 38 (100=1985, the year the measurement began).

Oh no, the commentators say, now that people have started saving. In an economy that is two-thirds consumer spending, how can we hope to recover if the consumer won’t consume? They have a name for this: The paradox of thrift. A healthy economy depends on a substantial savings rate; our unhealthy economy can’t recover if people don’t spend.

A critical example is the American auto industry, which suffered an 18 percent drop in sales for 2008 and will see a further 20 percent drop in 2009 sales, if forecasters are correct. If the Big Three American automakers went under, nearly 3 million jobs in the automaking industry and related services would be lost, according to the Center for Autmotive Research. Few people want to see the American automakers go under, but too many of us have been blown off the road, economically speaking. We’re supposed to keep consuming because the economy needs jobs? That party is over.

The country lost more than 500,000 jobs in December alone, a 200 percent increase from the previous December. Housing prices nationwide have dropped 23 percent since the summer of 2006 and are still falling. Credit card issuers are expected to lop $2 trillion off credit lines nationwide over the next 18 months, which translates to a 45 percent contraction in credit lines.
So, between the people who are unemployed , the people who no longer have home equity to tap, the people whose credit cards have shrunk, who’s left to spend?

Those who were savers, those with relatively large, secure incomes? Many of those people have seen their retirement nest eggs shrink, along with the Dow Jones Industrial Average. Many of them look at what has happened in the last year—on Wall Street and on their street—and they’re deciding to just say no to the big vacation, the beach house, the early retirement. Even if their personal balance sheet hasn’t suffered much, after the meltdowns, the bailouts, the Paulson schemes, the Ponzi schemes, who knows what lies ahead?

Most of us don’t have much control over what the policymakers or the macro economy will do next. But we do have control over the micro economy in our household. In this environment we get pretty clear, pretty fast, about what’s a necessity and what’s a luxury. That equation is different for everybody, but it’s a good bet that lavish restaurants, the leased Mercedes, the in-home theater, maybe even the weekly pedicure, are falling off the must-have list. Paradox of Thrift, meet the Need to Survive.

What do you think? Do you feel the need to spend to help save jobs? If not, what has fallen off your must-have list?