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[bobf <bobford79 AT yahoo.com>]

This was just posted tonight in the WSJ.  People are starting to become more 
careful with their finances, but, according to the author, right now, that is 
bad for the national economy.  Obvioisly, the editorial direction at the WSJ 
would normally be toward savings and thrift. so it is an unusual and 
interesting article.

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JANUARY 5, 2009, 9:07 P.M.

Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes 
Article
 
By KELLY EVANS

BOISE, Idaho -- Rick and Noreen Capp recently reduced their credit-card debt, 
opened a savings account and stopped taking their two children to 
restaurants. Jessica and Alan Muir have started buying children's clothes at 
steep markdowns, splitting bulk-food purchases with other families and 
gathering their firewood instead of buying it for $200 a cord.

 As layoffs and store closures grip Boise, these two local families hope 
their newfound frugality will see them through the economic downturn. But 
this same thriftiness, embraced by families across the U.S., is also a major 
reason the downturn may not soon end. Americans, fresh off a decadeslong 
buying spree, are finally saving more and spending less -- just as the 
economy needs their dollars the most.

Usually, frugality is good for individuals and for the economy. Savings serve 
as a reservoir of capital that can be used to finance investment, which helps 
raise a nation's standard of living. But in a recession, increased saving -- 
or its flip side, decreased spending -- can exacerbate the economy's woes. 
It's what economists call the "paradox of thrift."

U.S. household debt, which has been growing steadily since the Federal 
Reserve began tracking it in 1952, declined for the first time in the third 
quarter of 2008. In the same quarter, U.S. consumer spending growth declined 
for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government 
calculates as the difference between earnings and expenditures. In recent 
years, as Americans spent more than they earned, the personal saving rate 
dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or 
even higher, in 2009, among the sharpest reversals since World War II. 
Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% 
to 10%.

As savings increase, economists say, spending is likely to contract further. 
They expect gross domestic product to decline at an annualized rate of at 
least 5% in the fourth quarter, the biggest drop in a quarter-century.

"The idea that the American family will quickly spend us out of this 
recession is a fantasy. It won't happen," said Elizabeth Warren, a professor 
of law at Harvard University who last month was named chair of the 
Congressional oversight panel tasked with overseeing the distribution of the 
government's Troubled Asset Relief Program funds.

In Boise, families like the Capps and Muirs illustrate the paradox. This 
metropolitan area at the foot of the Rocky Mountains is home to a 
half-million people and is a base for electronics manufacturers such as 
computer-chip maker Micron Technology Inc. The area weathered downturns in 
the early 1990s and 2001, with unemployment rates remaining well below the 
national average. But now people here are socking away money they once would 
have spent, contributing in part to failing stores, shuttered restaurants and 
rising unemployment.

View Full Image

Todd Meier for The Wall Street Journal
Rick Capp with daughter Ellen and son Noah at home in Meridian, Idaho. Like 
many in the Boise area, the Capp family trimmed spending throughout the year 
as the economy turned; Mr. Capp lost his job in October.
In 2003, the Capps moved to Boise from Swisswater, Pa., after Mr. Capp 
received an offer to work for Electroglas Inc., a company that makes 
equipment used in producing semiconductors. Pay for his field-service 
engineer job started at $65,000, and Boise's cost of living was lower than 
Pennsylvania's. Rick and Noreen and their two children -- Noah, now 13 years 
old, and Ellen, now 16 -- were excited to ski in the Rockies instead of the 
Poconos.

The Capps sold their Pennsylvania home for $164,000 and bought a slightly 
larger, 2,200-square-foot home on a cul-de-sac in the Boise suburb of 
Meridian. They financed the $175,000 home with a 30-year mortgage, at a fixed 
rate of 5.8%.

Their children settled in well: Ellen sings in the school choir at Meridian 
High School, while Noah went to a local charter school and signed up for the 
chess club. In 2006, Mrs. Capp, now 45, finished her bachelor's degree in 
psychology from Boise State University, and began working part-time for a 
mental-health clinic, earning about $10,000 a year. Mr. Capp, 44, also took 
classes at BSU.

Four years ago, the Capps took out a $25,000 line of credit on their home and 
used it to buy a large sectional couch for their family room and a used 
Toyota 4Runner, 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.

But given the rising value of their home and of Mr. Capp's stock options, 
their debt didn't seem alarmingly high, they said. As the resale value of 
their home reached nearly $300,000 in 2006, the family took trips to 
Disneyland, paid $900 for ski passes and signed Ellen up for fiddle lessons.

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 customers put off servicing their equipment. "It's just 
been one thing after another," says Mrs. Capp.

The Capps started cutting back. In late spring, they began to trim their 
spending and paid down about half of their $11,000 credit-card debt. This 
summer, they used more than half of their government stimulus check, about 
$1,000, to open a savings account with an attractive interest rate of 5%.

"We never go downtown anymore," says Mrs. Capp. "We're trying to consume less 
gas, less electricity, less food. It's across the board."

Even the family's cable-TV subscription didn't escape the scalpel. "It's been 
killing me because I don't get the Cartoon Network anymore," says Noah, a 
shaggy-haired teen. "I'm missing so many new shows."


The impact of such decisions is visible around Boise. At Home Federal 
Bancorp, a $725 million bank with 15 area branches, the number of new savings 
accounts was up by 26% in December from the previous year, said Steve Eyre, 
the bank's head of consumer banking. He said the bank is also seeing people 
save in their checking or money-market accounts. "It's pretty interesting to 
see those balances actually increase at a time when there's higher 
unemployment," he said.

Meanwhile, many downtown restaurants have closed this year, including a 
number of locally owned eateries. Satchell's -- a family restaurant that was 
the Capps' favorite -- is gone, as are Zutto Japanese Restaurant, the 8th 
Street Wine Company, Mortimer's Idaho Cuisine, Gino's Grill, the MilkyWay and 
a French place called Andrae's. Retail store closings have become so 
pervasive that the sign outside one surviving store, Dick's Stereo, now 
proclaims "WE ARE STILL HERE."

National retailers are pulling out as well. The Boise Towne Square, the 
region's primary shopping mall, is losing one of its anchor tenants, a 
Mervyn's department store. A furniture store across the street has also gone 
out of business. A nearby plaza has lost its two main tenants -- Linens 'n' 
Things and Circuit City -- as both liquidate nationwide.

Unemployment in the Boise area is still below the national average of 6.7%. 
But the rate 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, about the same rate forecast for the nation as a 
whole.

By October, Mr. Capp, too, was out of work. His employer, Electroglas, 
trimmed its North American work force of field technicians from more than a 
dozen when Mr. Capp started to just four after he and several colleagues lost 
their positions, he said. Electroglas, based in San Jose, Calif., declined to 
comment.

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 dwindling 
remainder.

Frugality has become a family responsibility. Mrs. Capp, a friendly and 
effervescent woman, nixed replacing her Toyota Corolla, even though it has 
253,000 miles on it, a cracked windshield and Hawaiian-print covers over its 
splitting seats. The Capps have given up on skiing this year. Disposable 
paper towels have been replaced by washable rags.

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. They've considered having their tall, lanky daughter try 
modeling, but portfolio shots cost a couple hundred dollars.

Jessica Muir, too, would like to be socking money away for her children's 
college educations. But the 31-year-old mother of three says she also can't 
afford it now.

Jessica and Alan were high-school sweethearts in Caldwell, a small community 
near Boise. They married young. Mrs. Muir worked as a dental assistant before 
the couple's first child, Gavin, was born five years ago. In 2006, Mrs. Muir 
gave birth to twins.

The same year, they bought a modest two-story home in Nampa, part of the 
Boise metropolitan area, with enough room in back for a vegetable garden. 
Unable to afford a 20% down payment, they took out two mortgages to buy the 
$144,000 home. Mrs. Muir cashed in her 401(k), using the roughly $3,000 to 
pay for insulation and a fence. The Muirs figured they'd get their money back 
when they sold the house for a higher price a few years later.

It hasn't worked out that way, with real-estate prices falling along with the 
rest of their investments. Alan Muir's government job as an Agriculture 
Department grape researcher is more secure than most, but his combined 401(k) 
and individual retirement account is down by about half, to $13,000.

To pare back, Mrs. Muir started "the Moneysavers Club," an email group of 
about 30 people. The members alert each other about deals such as $8 winter 
coats at Old Navy, and they split bulk purchases of sugar and other staples. 
Mrs. Muir stores food in her garage, including vegetables she's grown and 
canned herself. When she saw a great deal on eggs recently she bought 10 
dozen, which she cracked into ice-cube trays, froze and transfered to bags 
for cold storage. "Not many people know eggs freeze," she said.

She also sells hand-crocheted hats and scarves on Craigslist and at local 
bazaars, bringing in $85 on a recent weekend. Her husband, meanwhile, charges 
$20 an hour for guitar lessons on Wednesday nights, and takes trips into the 
Rockies with friends to cut firewood for the family's wood-burning stove. The 
couple also recently split the $600 cost of a yearling calf with Mrs. Muir's 
parents, who are raising it on their land in Caldwell. They plan to butcher 
it and eat the meat.

The cutbacks by the Muirs and others their age mark a particularly profound 
shift. In the American buying spree of recent years, the most profligate 
spenders were those under 35. As recently as 2006, for every $100 these 
Americans earned, they spent about $117. Those aged 35 to 55 had negative 
saving rates nearly as large. Only the large number of Americans 55 and 
older, who have always had high double-digit saving rates, kept the overall 
saving rate above zero, according to data from Moody's Economy.com and the 
Federal Reserve.

Several factors are now pushing saving rates upward, including tighter 
restrictions on credit and home borrowing. Growth in consumer credit slowed 
to 1.2% at an annual rate in the third quarter, the Fed said, far lower than 
the 3.9% pace in the prior quarter.

The Muirs and Capps, like many Americans, also reined in holiday spending 
this year. Mrs. Muir started her shopping in July to snatch up bargains.

Mr. Capp didn't want to spend any money at all on family gifts this year. His 
wife persuaded him that they could spare a few hundred dollars.

The Capps ended up 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 the Nintendo 
Wii video game that was a Christmas gift for the whole family.

This year, Mrs. Capp and her husband are resolved not to touch the $2,600 
they have in savings, and to augment as soon as possible. "You look around, 
you see the closing stores, and you know someone needs to spend," Mr. Capp 
said. "Just not us."

Write to Kelly Evans at kelly.evans AT wsj.com

http://online.wsj.com/article/SB123120525879656021.html