Saturday, January 10, 2009

Puritans versus spendthrifts: recession’s culture war

By John Willman
Published: January 9 2009 19:57 Financial Times

Sexual intercourse began in 1963, according to the English poet, Philip Larkin – around the same time as the US historian, David Tucker, pinpoints the death of America’s love affair with thrift. In the affluent society created by the postwar boom, instant gratification replaced the deferred variety, and consumption eclipsed frugality as the spirit of the age.

Today saving is back in vogue, as western economies struggle to recover from the after-effects of spending supercharged by excessive borrowing. However, the task facing the world’s leaders is to persuade terrified consumers to spend like there is no tomorrow – and that a return to thrift would make matters much worse.

In theory, it should not be too difficult to persuade people to spend. As Professor Tucker put it in his book on the decline of thrift, humanity in its first 2m years of hunter-gathering was less thrifty than squirrels and ants when it came to hoarding food for the bad times. Once humans invented agriculture, they learnt the value of saving seeds for planting and surplus food for the winter. But when they moved into towns and cities, they developed a love for luxury, waste and extravagance that even religious asceticism struggled to curb.

The heirs of the original Puritans in the New World kept faith with frugality, however – none more so than Benjamin Franklin, whose pamphlet, The Way to Wealth, exalted thrift. “If you would be wealthy,” he advised, “think of saving as well as getting ... What maintains one vice would bring up two children.”

Max Weber, the pioneer of sociology, attributed the rise of capitalism to such Protestant sentiments, which abhorred wasteful spending but urged believers to follow their secular vocations zealously. A hardworking and thrifty person would be of value to the community and to God.

Yet consumption of luxuries always breaks through whenever the consequences of such ethical behaviour lift life above survival. Only when the economy slips into recessions do free-spending consumers remember the virtues of thrift and rebuild their savings safety nets. It took the economic insights of John Maynard Keynes to realise that such retrenchment could be disastrous for the economy as a whole – however rational it might seem to the individuals. Writing during the Great Depression, Keynes described this as the paradox of thrift – the more people saved, the more demand for goods and services fell.

In a 1931 BBC radio talk, he said the urge to save more than usual at times of recession was “utterly harmful and misguided”. When there was a surplus of labour, saving merely added to it – creating a vicious spiral of increasing unemployment.

“Therefore, O patriotic housewives,” he urged, “sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised ... Lay in a stock of household linen, of sheets and blankets to satisfy all your needs.

“And have the added joy that you are increasing employment, adding to the wealth of the country because you are setting on foot useful activities, bringing a chance and a hope to Lancashire, Yorkshire and Belfast.”

Today’s finance ministers could not put the case for spending more eloquently and there will be some who will respond. They include Generation Y, people born since the early 1980s who have been more susceptible to instant gratification than their parents and grandparents.

Debt for them is a way of life that starts at university and continues when they climb on to the housing ladder. These Net Geners – who include my own children – have no memory of past recessions that would prompt them to curb their spending. They are also disinclined to be held back by the attitudes of their baby-boomer parents who built their lives on work and self-denial.

Those at the bottom of the social pyramid are also less inclined to worry about deferring gratification, since shortage of cash makes tomorrow’s needs seem like a foreign country. Poverty campaigners often argue that the best way to give the economy a quick boost is to cut taxes or raise benefits for this group, who will spend the money immediately.

The middle classes, in contrast, will use any additional finance at times such as this to reduce debt and build up savings against the increased likelihood of a rainy day – justifying Keynes’s fears. They are also likely to reason, justifiably, that when asset prices are falling, money held back now will buy more later.

Older people will also be unwilling to spend liberally, with memories of previous recessions and fears about their pensions when stock markets have fallen sharply. Those who rely on savings to top up their pensions will in any case be feeling cash-strapped as interest rates plummet towards zero.

Since it is the older generation and the middle classes who are best off, exhortations to consume more for the greater good are unlikely to be enough. Keynes recognised that as well, which was why he concluded that government spending was the solution to the paradox of thrift.

Some countries have understandable cultural problems with printing money to finance economic activity. But US president-elect Barack Obama and the UK’s Gordon Brown are both drawing up the sort of ambitious public infrastructure programmes that are needed to put the economy right. In the present circumstances, it is governments, not consumers, that will provide the instant gratification needed to boost the economy.

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