This Sunday’s New York Times Magazine ran a letter to the editor by Economics Professor John Lunn and Accountancy Assistant Professor Martha LaBarge, both of Hope College, Michigan. The letter comments on Paul Krugman’s article in the September 6, 2009 edition, “How Did Economists Get It So Wrong?”
In their letter, they note that historically, some “bubbles” never led to recessions, and they add this interesting remark:
The market system works well most of the time. Perhaps a key factor affecting whether a shock to the system or even “irrational exuberance” leads to a serious recession is the level of buffer stocks held by households and firms. When savings exist and debt levels are not inordinately high, the economy adjusts to a shock. But when debt levels are high and savings low, the bursting of bubbles in houses and equities can turn into a severe recession. (My emphasis)
How much more dead on target can you get?
This is exactly what I’ve been trying to say for lo! these many months: living within your means, refraining from purchasing objects and services that you don’t really need, and staying out of debt not only do not harm the economy, as steady long-term habits they actually benefit the economy.
A major contributing factor to the late (we hope), great deprecession was that far too many Americans took on far more debt than they could repay. Innocent of the potential consequences of the many questionable loans that were offered, people were led to pay more than properties were worth through loans whose ballooning payments they couldn’t hope to cover even if they had not lost their jobs. Not only that, but they were up to their schnozzes in credit-card debt and car loans.
Had the average man and woman on the street taken a more realistic view of their lifestyles, had they been spending no more than they earned, had they restricted borrowing to instruments whose terms and balances they could reasonably handle and to lenders that do not charge usurious rates, had they been setting aside adequate funds in savings, even the run-up and collapse in housing prices might not have pushed the economy into a recession as profound as the one we’ve been experiencing.
This brings me back to my basic thesis: Frugal living is not just the responsible thing to do. Frugal living is patriotic.
Image: Public Domain. Wikipedia Commons.