What’s the patriotic thing to do: consume or save?

Making the right choice

Fred Mael

Another year has passed, thus completing the annual interfaith, nondenominational Season of Buying and Giving. And each year, I am perplexed by the same question: The Season’s success is measured by how much people buy from various retail merchants across the land. We are told that spending on toys, toasters, and trees increases profits, which is good for the economy. At the same time, we are also being told Americans don’t save enough and that our low savings rate is bad for the long-term health of the economy. What should a civic–minded person do?

As a psychologist, I could tell you why some people spend more than they can afford at the end of the year (more about that later). But to resolve my yearly question, I turned to Howard Rosen, a Washington-based economist who has studied the American saving deficit, together with groups such as the American Savings Education Council. Here is Rosen’s argument:

Save, Consume or Pay Taxes

People can do three things with their money – save, consume or pay taxes. In the short term, consuming stimulates the economy and creates jobs, although primarily in the retail sector. However, consumption does not necessarily create high wage-high skilled jobs in the production sector. Over the long-term, the economy is better off if people save and invest their money by putting it in the bank or a mutual fund, or by buying stocks and bonds. Your investment will appreciate (while what you buy generally will not) and it will also be used as capital to finance the creation of new jobs.

Although you may have to forego consumption in the short-run to save more, over the long-run you will have move money, enabling you to actually consume more, enabling you to support the retail sector.

The Perils of Low Savings

Many economists have bemoaned America’s low saving rate. (Actually, how the savings rate is computed is controversial for at least two reasons. One is that buying stocks is considered consumption even though logically, it is really savings. Second, the value of your house is not considered to be savings, yet Americans have one of the highest rates of home ownership and home equity is a uniquely American way of saving. Changing these metrics would make the US look better, even though the problem might still remain.). US investment in physical plants and equipment is currently very low. Although we invest a lot in research, we allow other countries to produce the fruits of that research. Much current US investment is in information technology, which may make us more productive, but may not always contribute to creating new jobs. In general, current gains in productivity may be coming at the expense of employment, rather than increasing it.

Over the last 30 years there has been an imbalance between spending and saving, thereby pushing up interest rates in the United States. To close this gap, we have become dependent on foreign capital. Others like to invest here, but our dependence on foreign investment is a Faustian bargain. In the short term, the inflow of foreign capital has propped up our economy, but it has also pushed up the value of the dollar, causing our imports to be cheaper and our exports to be more expensive. As a result, the US trade deficit has reached historic levels. At the same time, we lack the means to buy back that percentage of the country’s wealth not owned by others. The Federal government is exacerbating this problem by borrowing heavily to cover its own deficits. Every week we sell US Treasury bonds to the Chinese, the Japanese and others. If they sold their holdings, or even just stopped buying at the current rate for political or economic reasons, the US economy could easily go into a tailspin.

Give savings?

The US government created saving bonds more than 60 years ago in order to make it easier for everyone to save. US saving bonds continue to be a great saving vehicle, although they are hardly used by people. The American Savings Education Council does public service ads to try to popularize savings. However, one needs to be cautious about warnings about the need to save more; the economy tanked when President Jimmy Carter told everyone to cut up their credit cards. It’s hard to openly advocate policies that will jeopardize the livelihoods of so many people dependent on consumer retail spending. On the other hand, the ballooning federal deficit undermines any government effort to get people to save more and reduce consumer debt. One could go so far as to cast savings as a basic moral or civic issue, for it creates wealth which in turn promotes job opportunities, making government charity less necessary. So next year, it might make some sense to give gifts that “keeps giving” – such as giving your loved ones a US Savings Bond.

Why don’t we save?

At the individual level, the larger concern is that by spending instead of saving, people leave themselves little money for their retirement years, little for hardships or sudden disability, and little with which to help their children. Unless someone is actively over-spending in order to help the retail sector, as an act of self-sacrifice, we need to understand why people would actively choose the less rational path of not saving. The simple, even simplistic reason is a lack of self-control and giving in to impulses, including being too weak to resist the lure of advertising. However, that demeans a lot of well-meaning people who are not impulsive, defer their own gratification in many ways, and yet spend more than they have at year’s end. Why would they do so? Here are just some of the possible reasons.

They want to be heroes to their kids or at least not have their children angry at them for not matching what their friends got.

They “need” to reciprocate when other, wealthier relatives are giving them or their children expensive gifts.

They buy into a “You deserve a break today“mindset that says that at least once a year, one shouldn’t have to be fiscally conservative.

They want to be generous during the holiday season and figure that buying things for people is the best way.

They buy into the urban legend of the poor person who saved and saved for a post-retirement cruse or trip, only to die of a heart attack right before the trip. They don’t want to be pitied like that for having saved for nothing.

Society is so youth-oriented that they can’t imagine enjoying the money as much later when they aren’t as attractive or youthful. They want to spend to purchase love or admiration now.

At least some of these are legitimate concerns. For many it would take intense fortitude to resist the temptation to spend and not save, at this and all times of the year. It will also mean choosing a path that is harmful to those currently dependent on consumption for their livelihoods. What the economic theories don’t do is prescribe what everyone would do for a living if only those producing “useful” things would be considered contributors to society. For example, if you are an entrepreneur convincing people to buy what they don’t need or can’t afford, and have hired employees to make and sell this non-necessity, are you an American hero – or part of the problem? One might be that if people held off till they accumulated savings, they would end up spending more, so that even “frivolous” retail goods could be bought freely without harming the larger economy. However, that would favor the products produced for “mature” spenders rather than those geared to youth.

How should we best balance our saving and spending in order to do what is best for ourselves and best for society? (if that concerns us). These should be sobering questions for all of us in our many roles – business owner or manager, marketer, household head, advisor, consumer and citizen. The answers are not simple. At very least, we would be wise to approach these types of financial lifestyle choices with awareness of our being interdependent, and of our having an impact – whatever we choose to do.

Fred Mael (www.maelconsulting.com) is an organizational psychologist who does consulting in areas such as talent retention, organizational culture, and performance management, as well as executive and work/life coaching. This article appeared in the December 2005 issue of Baltimore SmartCEO magazine.