Does Penny-Pinching Encourage Economic Decline?

About the author: This is a guest post by Carson Brackney, writer for Personal Finance Analyst. Personal Finance Analyst is an online community of bloggers dedicated to taking the mystery out of money and helping you to live a happier, more successful life with the money you have.

In the wake of 9/11, President Bush encouraged Americans to keep shopping. He was worried that fears associated with the attack would slow the economic engine as concerned citizens might opt to “sit on” their money instead of spending it in a way that would keep the economy chugging along.

Apparently, Americans responded. We spent. We shopped. We felt that changing our behavior in response the tragedy would represent a victory for the enemy. In some weird way, we seemed to have felt a patriotic duty to maintain our spending habits.

Those of us who embrace sound personal financial management concepts never really bought into the “shop until the terrorists drop” line of thinking. Others, however did. And many of those others are actively encouraging the same kind of behavior in the face of current economic problems.

A recent piece of proposed legislation is a perfect example. In a rare show of bipartisanship, Republican Senator Kit Bond and Democratic Senator Barbara Mikulski are proposing a tax rebate to encourage the purchase of new automobiles. Their goal? To get some cash headed in Detroit’s direction.

Those of us who recognize the poor quality (in financial terms) of the decision to buy new cars know that the tax rebate won’t make things any different. We won’t buy that new car, even if it would give Detroit a boost.

Sometimes, it really seems like those of us interested in better personal finance decisions are doing our best to strangle an already-choking larger economy by reducing our own spending and consumption. Although that really isn’t the case (we’ll see why smart money management is a net plus for the economy as we work through this), there is a certain face-value irony in economizing during a time of wider economic turmoil.

As I write this, the heads of America’s three automotive giants are huddling together in Washington, trying to perfect a sales pitch for a multi-billion dollar bridge loan/bailout. Detroit is in trouble. People aren’t buying new cars and Big Auto claims that we’re only months away from an industry collapse that’s going to destroy hundreds of thousands of jobs and lives…

Meanwhile, Mint is telling us that cars are one of the eight things we should never buy new. Dave Ramsey is chastising someone for financing a new car. People are opting to stick with their old beaters in an effort to save money.

The stock market isn’t treading water. It’s sinking. One of the reasons? Consumer spending is in the tank. Browsers outnumber buyers and those who are willing to open a wallet are spending less. Based on those scary consumer confidence numbers, we can expect more of the same and that’s scaring money away from Wall Street. Our 401(k) numbers are bleak and the entire economy is grinding to a halt as we watch the Dow dip.

Meanwhile, personal finance experts are advising everyone to save more. Frugal living is “in” while conspicuous spending seems like a vestige from the days when women wore shoulder pads and guys wanted to be Gordon Gecko.

New housing starts are down and property values are in a freefall. Homes are no longer the safe buy they once were. People are waking up to discover that they’re upside-down on their largest single investment. Contractors are struggling, workers are standing in unemployment lines, vendors are suffering and development projects are suspended.

Meanwhile, advisers are telling people not to try to catch a falling knife. They’re recommending against the purchase of existing properties and are laughing outright at the idea of building a new home. This isn’t the time to spend, this is the time to sit on your money.

Are you seeing a trend here?

We’re actively engaging in the very behavior that encourages a larger financial crisis in order to protect ourselves from that very same financial crisis.

If you don’t buy that car, that makes it harder for GM or Ford to stay afloat. If they flop, your neighbor loses his job on the assembly line. He falls behind on house payments. The home enters foreclosure. Your property value takes a hit in the process.

You’re studying the Economides family’s every move, trying to cut your spending down to the bare minimum. You aren’t dropping big money at the grocery store anymore. That means the store isn’t ordering as much. The company selling those green beans has to let someone go. The cannery employee can’t find another job in her neck of the woods. She has to go on unemployment and then welfare. What’s paying for the food stamps and Section 8 housing? Your tax dollars.

As the economic crisis has advanced, we’ve heard more and more about businesses and industries that are now on the very brink of collapse. We all know that the only way many of these outfits can stay open is if they continue to sell their products. Yet we’re still preaching the gospel of recession-proofing your life.

Is this the irony of economizing? By protecting our own interests with conservative money management are we actually encouraging the economic slowdown? Do our efforts at self-defense empower our enemy?

Don’t worry. You can be a good personal money manager and good for the economy. The apparent tension isn’t quite as significant as it looks at first glance.

First, it’s almost certain that those who look after their money carefully will remain in the minority. Yes, everyone seems to be cutting back these days, but I doubt that a significant percentage of that decreased consumer spending stems from intentional, voluntary “austerity measures.” The economizers and those who are smart about personal finances are the exception to the larger rule. Thus, those efforts to manage money correctly will be swamped on a macro-level by those who will continue to act without much consideration for the protection of their financial interests. That’s just an “accidental” situation, though. What’s more important is that smart money handling actually benefits the economy.

That brings us to the second reason you shouldn’t feel guilty for exercising good decision making. Smart personal financial management and decreased spending has an economic upside. Those who are in control of their money and debt are able to invest their resources while “the rest” stay on an ugly barely-making-it treadmill. Those investments provide needed capital to the most deserving and potentially valuable institutions and businesses. While we might be taking our money out of the loop on one side of the equation, we’re feeding the economy on the other.

Third, “you gotta have it to spend it.” If we’ve learned anything over the years, it’s that wild spending and bad financial management eventually come back to haunt us. Those who do economize and invest wisely are later positioned to contribute to consumer spending in a way that those who are constantly on the brink of personal financial collapse can’t. The current economic crisis is PSA for responsible spending. We’re living through the nasty hangover that comes after a weekend of binge drinking. Foolish credit purchases are the stand-in for the keg.

We didn’t really have a patriotic duty to maintain spending habits in late 2001 and we certainly don’t have a national economic obligation to go out and buy new cars and other unneeded consumer goods today.

Sometimes it seems as if we’re working at cross-purposes with our best interests. We’re watching a struggle born of reduced economic activity while intentionally reducing our own spending. If you look at it on that level, it appears as if we’re intentionally punching ourselves in the gut. If you view it from a broader perspective, however, it’s clear that there is no tension between economization and a stronger economy. If anything, more responsible personal money management is exactly what our economy needs.

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