- The Washington Times - Wednesday, December 10, 2008

Some refer to it as the “prisoner’s dilemma,” while others call it the “paradox of thrift.” By any name, it means that too much individual thriftiness - saving for a rainy day - practiced en masse exacerbates economic distress on a societal scale.

That’s where we are now.

People - even those who can - aren’t spending their money.

It’s not out of sympathy for those who go without, says University of Maryland economist Jeffrey F. Werling, but rather a fear of continued downturns and lack of confidence in government and financial markets.

“People feel like the system has failed them,” Mr. Werling says. “Everyone starts saving at the same time, and it contributes to the downward spiral.”

It’s a downward spiral because - “unfortunately” - two-thirds of the economy is based on consumer spending, says Mike Stanfield, chief executive of VSR Financial Services Inc.

That’s an awfully heavy burden on the consumer: the idea that if you don’t spend, you are hurting the economy, says Stuart Vyse, psychologist and author of “Going Broke: Why Americans Can’t Hold On to Their Money.”

“It’s very hard on the consumer,” Mr. Vyse says.

Which begs the question, how did we get here, to a place where consumers’ shopping habits at the Gap Inc. and Best Buy Co. Inc. are the prime drivers of our giant economy?

“It’s a direct product of everything going so well for us,” Mr. Werling says. “It’s because we’re so rich that consumption can drive the economy.”

The problem has been that we “afforded” our consumption by borrowing: China lends the United States money cheaply on the condition that we continue buying that country’s products.

“Essentially, 7 percent of our income was borrowed in order for us to live beyond our means,” Mr. Werling says. “In the back of our heads, we knew this would end in tears.”

Still, living beyond our means became part of the nation’s psyche.

“Americans are optimists. We think the future is bright. Real estate values will continue to rise, the stock market will continue to go up, as will my salary,” Mr. Vyse says. “And there’s a certain exuberance that comes with spending.”

Particularly spending while using a credit card. We enjoy the purchased item in the here and now while postponing the financial pain for at least a month.

“But we went too far in order to maintain the economy,” Mr. Vyse says. “Borrowing against our homes, putting more and more on our credit cards. It just wasn’t sustainable.”

Ironically, it’s at a time when our economy needs us to spend that we clamp down, Mr. Werling says. It’s during the good years of full employment that we should be stashing cash for rainy days - not during torrential downpours.

However, if the consumer is busy paying down debt (the average American household has more than $8,000 in credit-card debt) or looking for a job (November produced another 553,000 layoffs, landing the total unemployment rate at 6.7 percent) and those who can spend are saving for a rainy day, who is going to spend money and drive the economy?

Mr. Werling’s - proverbial - money is on the government. With more stimulus packages and plans that include investing in new, job-yielding technologies and infrastructure, things could start looking up in a year or so. Also, he predicts the value of the dollar will drop and exports will rise.

Mr. Stanfield echoes the sentiment and adds:

“We need to solve our energy issues both by drilling [for oil] and by creating new green energy,” Mr. Stanfield says. “That could create thousands of new jobs here in America.”

He’s also in favor of tax cuts, preferably permanent ones that would put more money in the pockets of American consumers.

In the meantime, with Americans holding tight to their cash, retailers are facing what may be the worst holiday season in 20 years.

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