Commentary

Don’t Be Frugal to Follow Recession Chic

By Will Wilkinson
This article appeared on Marketplace on December 17, 2008

Penny-pinching is a time-honored recession tradition. For those who’ve lost a job, are dealing with reduced hours or wages, or face a real risk of economic pain, it’s plain sense to do what it takes to make ends meet in lean times. Cancel Showtime, pile on the sweaters, go unto the checkout armed with coupons. When you have to do it, belt-tightening’s no joke.

But, gladly, most Americans don’t have to — not even in this economy. Most of us won’t lose our jobs, won’t face a pay cut. Yet we tighten anyway. Dollar-stretching tips circulate even among the most comfortable. But if your paycheck’s intact and you’re still cutting back, you may be part of the problem.

When home values surge, we tend to feel richer and spend a bit more, even if we don’t plan to sell the house. Economists call this “the wealth effect,” and it’s got a recessionary flip side. So when our 401(k)s dive as the economy hits a rough patch, we feel a bit of a pinch and rein in consumption — even when our incomes and the long-term value of our investments hasn’t changed a bit. In short, we don’t always look to our personal financial fundamentals when choosing whether to splurge or scrimp.

But just as “irrational exuberance” can keep a speculative bubble afloat, equally irrational anxiety, and the ethos of austerity it produces, can trap us in the doldrums. So maybe you went a bit crazy during the boom, and now’s the time to return to financial sanity. Good! But if you were living comfortably and responsibly within your means last year, you probably don’t need to cut back now.

Of course, none of us is duty-bound to stimulate the economy by snapping up 50-inch plasma screens just because we can afford it. But if you’re blessed with good fortune in these hard times, you’re not helping anyone if you let frugality chic stop you and yours from having a very Merry Christmas indeed.

Media Appearance Will Wilkinson says,”if you can, you should keep spending” on Marketplace (December 17, 2008) [MP3]

Will Wilkinson is a research fellow at the Cato Institute.