Whenever there's a recession, consumers tend to spend less and save more. It's a pattern repeated during virtually every major recession on record.
Don't mind us if we put a little away, Ms Hilton
Whenever there's a recession, consumers tend to spend less and save more. It's a pattern repeated during virtually every major recession on record, and one that is rearing its head again in a global economy that remains far from healthy, despite a few recent signs in the developed world that things are picking up. The World Bank is predicting a decline in global GDP of 2.9 per cent - it revised its outlook downward this week - and the Organisation for Economic Co-operation and Development (OECD) is looking at similar, though slightly more optimistic numbers.
Meanwhile, the household savings rate in the US climbed to 5.7 per cent in April, up from a record minus 2.7 per cent rate in the boom times of 2005. The same trend has been seen across Europe, where savings rates have historically been higher than in the US. In France, for example, the rate climbed from 14.2 per cent in 2006 to 15.9 per cent at the end of last year. Savings rate figures are not available for the UAE, but bank deposits have increased by 13.4 per cent since last August, which may indicate that people are saving more than they are spending.
Saving during bad times makes sense. Unemployment is one big symptom of declining economies, leading people to fear for their jobs. So it stands to reason they will save more to tide themselves over in case they are made redundant. Of course, people also worry about their savings and investments, which tend to decline in value during recessions. That might mean saving more money for retirement, or making up for the falling value of a stock portfolio by increasing savings.
But what is arguably most needed in a recession is a band of free-spending Paris Hiltons, not a bunch of prudent misers who save like mad and won't part with a dirham. If everybody becomes stingy, after all, demand for goods and services declines, which means fewer people are needed in the workforce to supply those goods and services. That translates into salary reductions, lower corporate profits and layoffs. Economies thrive on spending, not saving.
John Maynard Keynes, a British economist whose ideas about government intervention in economies have come back into vogue in the financial crisis, described this combination of rising savings in tough economic times and the need for more spending to reinvigorate the economy as the "paradox of thrift". That paradox is something that none other than Ms Hilton, who has been in Dubai for the past week or so working on a reality show, seems to understand well.
While in her case it might serve merely as a justification for loading up on designer handbags and diamond-studded Dolce & Gabbana dresses, Ms Hilton has recently been holding up her spending as a model for how we'll solve the world's economic woes. She has not been quoting Keynes, to be sure, but she has been extolling the many virtues of parting with cash instead of hoarding it. "I am helping the economy by doing a lot of shopping," she told the UK's Tatler magazine last month.
Unfortunately, though (sorry, Paris), not everyone agrees with the paradox of thrift argument, at least as it applies at the individual level. Opponents argue that, for one thing, governments and not consumers should be the drivers of stimulus spending in recessions. Another argument holds that more savings have a stimulative effect: banks lend money based on deposits, and more savings mean more deposits. With more money flowing through the banking system, the argument goes, banks can lend greater amounts to the large industrial players such as developers, construction firms and manufacturing companies that really drive growth.
Yet another argument against the paradox of thrift concept is this: consumers should live within their means, and average people should not over-leverage themselves when they are facing dire economic straits. Even if such behaviour were advisable on a macroeconomic level, it would be nearly impossible to influence such decision-making on a microeconomic level. The crux of the disagreement between the two sides - one for spending during recessive times, the other for saving - seems to me to lie in a divergence of economic benefits when perceived from a distance and up close.
It's hard to argue that more spending is not good in the wider scheme of things when a downturn sets in, because spending does stimulate economic activity. Zoom in a bit, though, and it is equally clear that not every actor in the economy would be well advised to spend, spend, spend, if he can't afford to do so without digging deeper into debt. So the final take on this trend in which people are saving more and spending less, is simple: if you can't afford to spend, don't do it.
But if you're Paris Hilton, who made something like US$7 million (Dh25.7m) in 2006, according to Forbes magazine, you might as well go ahead. The economy needs you. email@example.com