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  • From: bobf <bobford79 AT yahoo.com>
  • To: homestead AT lists.ibiblio.org
  • Subject: [Homestead] The "Paradox of Thrift" -frugality & the economy
  • Date: Mon, 5 Jan 2009 18:54:20 -0800 (PST)

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








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