You Need to Save. But Collectively, We Need to Spend

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Does anyone see a conflict here?

To paraphrase The Clash, should I save or should I spend? Saving is obviously good for the individual doing the saving. But spending is what drives the economy, so long as you don’t dig yourself too far into debt. Therein lies the problem.

An LA Times columnist enters the debate:

Am I supposed to buy … everything in sight to help fuel the economic recovery?

Or am I supposed to stifle the consumptive urge and sock away every spare nickel and dime, because the national buying binge helped cause the crash and I could be out of work by Friday?

Good question. For answers, he turns to an economist, Christopher Thornberg, who offers this advice about credit cards and debt:

“If you don’t have the ability to pay off the credit card at the end of the month, you shouldn’t use it,” said Thornberg, chief economist for the California state controller and a former senior lecturer at UCLA’s Anderson School.

That sounds positively un-American, doesn’t it? Particularly in December.

But Thornberg insisted that debt is something you should only take on for a long-term asset that you pay for over many years. A house, for instance. But you don’t take on debt to buy iPods for the family, he said, or you’re asking for big trouble, especially given the outrageous finance charges.

Totally makes sense. But if consumers are acting sensibly, and not buying “everything in sight,” doesn’t the economy stagnate, making it harder for people to find jobs, which in turn worsens the economy because people have no income to spend, and on and on in a snowball effect?

Well, pretty much, yeah. So how do we get the economy humming along again? As the NY Times wrote recently, the economic crisis ends basically when people decide it has ended. Once people reach that conclusion, they’ll start spending again, and the crisis will be over. Hello, chicken, egg anyone?

Perhaps Ben Bernanke can do a Jedi mind trick on a national scale: Instead of “These aren’t the droids you’re looking for,” Ben (Bernanke, not Kenobi) could casually wave a few fingers and say something like “Aren’t you due for a new wardrobe?”

Don’t worry: The trick will only work on the weak-minded.

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