Sam Uretsky

The Paradox of Thrift

On March 2, the New York Times reported that Sharon Baum, a wildly successful New York City real estate agent, was giving up her signature Rolls Royce. Ms. Baum was known for taking her upscale clients around the city in the Rolls, and it apparently never triggered the notion that if she could afford that luxury, maybe she could cut her commission by a percent or two. Still, with the world economy in free fall, the Rolls seemed to be of questionable taste, and Ms. Baum was considering scaling back to a station wagon. On March 5, on the Times’ web site, conservative columnist David Brooks suggested that the appropriate cars for the financial melt down were the relatively unrecognized luxury makes, Acura, Audi and Infiniti. These cars are the Hydrox to the Oreo of Lexus and BMW. They compete with better-known luxury brands, but lack the image and can be driven without embarrassment by those suffering from survivor’s guilt.

This is the Veblen side of Keynes’ Paradox of Thrift. Keynes noted that in an economic downturn, when macroeconomics calls for anyone with any spare change get out and buy, the microeconomic response is to pull back and save. The super-rich don’t seem to be bothered at all, but the merely secure are guilt ridden by displays of solvency. When those who have an income cut back, whether because they’re afraid for themselves, or because they consider it in bad taste to feel financially secure while others are in trouble, things just get worse. The economic reality, Keynes meets Veblen meets Malthus, is that relatively few people are required to provide for basic human needs. People who produce food, housing, clothing and some of the people in the health professions are essential; everybody else is doing a make-work job. The unique feature of the human species, beyond the opposable thumb and bicameral mind, is the inclination to waste. The average simian is satisfied with food, shelter, sex, and freedom from fleas; only humans want gold flakes in their vodka, or prosthetic testicles for neutered dogs.

This seems to go back a long time. Of the seven wonders of the ancient world, only one, the Lighthouse of Alexandria, seems to have had any practical use.

Interestingly, Professor Casey Mulligan of the University of Chicago has written that in spite of everything, the amount of disposable income available—the money that people could spend if they were willing to—has continued to increase in spite of the bad economic news, but people aren’t spending it. He concludes, “This suggests that the fundamental cause of low consumption spending is consumers’ recognition that their homes and businesses are worth less. It also suggests that consumer spending may be headed even lower.” That’s a professional interpretation, but it might also suggest that people don’t feel their incomes are secure, but also, that any expenditures beyond the essentials are in poor taste, and reflect a lack of sympathy with the newly poor.

We may not all be able to give up our private jets, or cancel corporate junkets to Aruba, but we can all find some way to illustrate our empathy, except that when we all do it on short notice, every business that depended on discretionary and impulse spending will suffer.

It’s a rational economic behavior—better not take a vacation because you may not have a job when you get back. That’s the Keynesian paradox. The way out of a downturn is to get people spending, just at a time when anybody with sense is looking for new ways to prepare fish heads and replacing the Chateau Latour with dandelion wine. And that, ultimately, is why government has to run major deficits, because it has to do the spending that we won’t do ourselves.

The stimulus package is already smaller than it should be—partly because the administration may be slightly behind the curve on how fast things are going sour, but equally because the the key Republican senators, Collins and Snowe of Maine, who along with Sen. Specter of Pennsylvania, showed great political courage in supporting the stimulus bill, but still felt a need to exercise restraint. But to these senators, whose discipline is honest and honorable, tack on the grandstanding governors who said they would reject the money in the interest of getting national attention.

Well, Paul Krugman’s Economics sells at $127.17, and Paul Samuelson’s textbook, which remains the gold standard for introductory texts, goes for $133. Giving a copy of each to every senator and governor could be part of the next stimulus package. If they’re embarrassed to be seen reading anything that expensive, plain brown wrappers will be provided. There’s a chance that Sen. Vitter (R-La.) has some to spare, so they wouldn’t increase expenses. That’s win-win if anything is.

Sam Uretsky is a writer and pharmacist living on Long Island, N.Y.

From The Progressive Populist, May 1, 2009

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