TOO MUCH TOO LATE
Americans are finally starting to save money, but now, it’s killing the economy
<span style='font-family:Impact'>By KELLY EVANS
The Wall Street Journal</span>
Rick and Noreen Capp recently reduced their credit-card debt, opened a savings account and stopped taking their two children to restaurants. As layoffs and store closures grip their hometown of Boise, Idaho, the Capp family hopes their frugal habits will see them through the economic downturn.
But it’s these frugal ways, adopted by families across the U.S., that may end up prolonging the downturn. After a long buying spree, Americans are finally saving more and spending less—at a time when the economy desperately needs them to do the opposite.
<span style='color:red'>THE PARADOX OF THRIFT</span>
The result is a rise in the personal saving rate—the difference between personal income and spending. For the last few years, the saving rate ran below zero, as Americans spent more than they earned, and borrowed to make up the difference. But now, changing habits and tighter credit are pushing saving rates upward, to about 3% to 5% of income.
Usually, saving money is good for families and the economy. Savings serve as a pool of capital that can be used by banks to finance investment, which helps raise a nation’s standard of living. But in a recession, increased saving—or decreased spending—can worsen economic conditions further, leading to business failures and unemployment. It’s what economists call the “paradox of thrift.”
Families like the Capps illustrate the paradox. They moved to the Boise area in 2003 from Swisswater, Pa., after Mr. Capp got work as a field-service engineer for Electroglas, a local high-tech company. Pay for his job started at $65,000, and Boise’s cost of living was lower than Pennsylvania’s.
The Capps sold their Pennsylvania home for $164,000 and bought a slightly larger home in a Boise suburb for $175,000. They financed it with a 30-year mortgage.
Their children, Noah and Ellen, settled in well. Ellen, 16, sings in her high-school choir, while Noah, 13, went to a local charter school and signed up for the chess club. In 2006, Mrs. Capp finished her bachelor’s degree in psychology from Boise State University, and began working part-time, earning about $10,000 a year. Mr. Capp, 44, also took classes at BSU.
Four years ago, the Capps took out a $25,000 credit line—a loan that they could tap whenever they needed to—and used it to buy a couch for their family room and a used Toyota SUV, to go along with the family’s 1995 Toyota Corolla. Over the years, they also built up about $11,000 in credit-card debt and $40,000 in student loans.
Given the rising value of their home and of Mr. Capp’s stock options, their debt didn’t worry them, they say.
<span style='color:red'>‘ONE THING AFTER ANOTHER’</span>
That all changed quickly. The housing market in Boise started to turn downward at the end of 2006, followed by the stock market and the economy. Around the end of 2007, Mr. Capp’s employer began laying off some of its field technicians as their workload shrank. “It’s just been one thing after another,” says Mrs. Capp.
Concerned, the Capps started cutting back. In late spring, they began to trim their spending and paid off about half of their credit-card debt. Last summer, they used more than half of their government stimulus check, about $1,000, to open a savings account. “We’re trying to consume less gas, less electricity, less food,” says Mrs. Capp. “It’s across the board.”
The impact of such decisions is visible around Boise. While the number of new savings accounts is up sharply at a local bank, many downtown restaurants have closed, including a number of locally owned eateries. Retail store closings have become so common that a sign outside one surviving store, Dick’s Stereo, now proclaims: “WE ARE STILL HERE.”
National retailers are pulling out as well. Boise Towne Square, the region’s primary shopping mall, is losing one of its anchor tenants, a Mervyn’s department store. A nearby plaza has lost its two main tenants—Linens ‘n’ Things and Circuit City; both chains are shutting down nationwide.
Unemployment in the Boise area has risen swiftly, to 6% in November 2008 from just 2.7% a year earlier. Unemployment is expected to climb to at least 8% by 2010, according to Moody’s Economy.com.
By October, Mr. Capp, too, was out of work. With a severance package of about $10,000, the Capps say they paid off their remaining $6,000 in credit-card debt and have been living off the rest.
So frugality has become a family responsibility. Mrs. Capp is keeping her car, even though it has 253,000 miles on it and a cracked windshield. Disposable paper towels have been replaced by washable rags. Premium cable-TV channels have been cut off.
Ellen’s college options are also limited. The family hadn’t started saving for college before the downturn and can’t put away enough money now. “We’re really pushing her toward scholarships or anything that can help pay for it,” says Mrs. Capp.
The Capps also reined in their holiday spree, spending about $370 in all, down from about $350 a person in previous years. Rather than spending Christmas day opening one gift an hour—a Capp tradition—they invited neighbors over to play on their Nintendo Wii, a Christmas gift for the whole family.
This year, Mrs. Capp and her husband have resolved not to touch the $2,600 they have in savings, and to start building on it soon. “You look around, you see the closing stores, and you know someone needs to spend,” Mr. Capp says. “Just not us.”
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OVERVIEW
Job losses and restricted credit have U.S. families embracing frugality; it’s one of the reasons why the economic downturn won’t end soon.
Questions & Answers
1 Why is saving money typically good for the overall economy? Why is saving money bad for the U.S. economy in a recession?
2 Explain the relationship between decreased consumer spending and the nation’s
unemployment rate.