Many consumers reluctant to spend

The Sacramento BeeMay 11, 2009 

Sara and David Dunham won't apologize for scrimping when they can, even if it means taking precious dollars out of the economy.

The Fair Oaks couple figure they're saving up to $200 a week on clothing, food and other expenses. It's been so long since the Dunhams have been to their favorite restaurant, they have trouble remembering the name (It's Il Forno Classico in Gold River.) They dipped into savings to buy a used car recently but have chipped away at other costs, even cutting by $5 the weekly allowance they send their oldest daughter at San Jose State.

"Let somebody else beef up the economy," Sara Dunham said. "I need to look at what my expenses and budget are."

The Dunhams' behavior demonstrates what's known as the "paradox of thrift," a phrase coined by 20th century economist John Maynard Keynes. The argument goes like this: Saving money might be a sound strategy for a family, but it can harm an already weak economy if everybody does it. As the economy deteriorates, everyone's nest egg suffers – hence the paradox.

"It's definitely for real," said Howard Roth, chief economist at the state Department of Finance. "They're cutting their spending, which from the individual's point of view makes sense, but if you add it all up for the nation, it makes the recession worse."

The numbers are starting to add up.

Though Americans' confidence in the economy is rebounding, as evidenced by a recent Reuters/University of Michigan survey, pocketbooks remain snapped shut. Consumer spending, which accounts for about two-thirds of all economic activity, fell 0.2 percent in March, reversing two straight monthly gains. In California, taxable retail sales have fallen 12 percent since the fiscal year began last July, although the figure partly reflects the drop in gas prices.

Layoffs and furloughs have hurt household incomes, while savings have fallen considerably despite recent gains in the stock market.

To read the complete article, visit www.sacbee.com.

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