Austerity Is Good for You and It Makes More Fun

The nature of economic cycles is that it produces excesses and then teaches us how we erred so we can fix those excesses during recessions. The details are not always easy to understand or track. They exist in a multitude of small decisions. Everything from working too little to spending too much on cars and houses to over-investing in new factories that make more than the market will absorb contribute. I've written in the past (Everything is an Investment) that poor decisions help cause the recession, and it is the austerity of the recession itself that helps people figure out how to better allocate their money.

The problem is that some people think this is bitter medicine, and don't like the taste. James Livingston of Rutgers sets a distinctly contrary tone to the Puritan work ethic in an excerpt published last week in Bloomberg (Austerity Is Bad for You and It’s No Fun).

So let's go over it again: In a boom cycle, people believe things that aren't true, or they are too aggressive. For example, they may believe houses will rise in price 50% in the next 3 years. Or they may believe this hamburger is $6 which is twice as much as the $3 hamburger but it doesn't matter if I overpay because it is better. If money were tighter, they would allocate it differently. By rewarding the maker of $6 hamburgers rather than the more efficient $3 eatery, they temporarily subsidize inefficient producers. They put more money into a house than they should, because there aren't enough people to live in it. But because they believe it will be worth more later, they move their stored time (savings, aka capital) into the additional house purchase.

Austerity acts as a catalyst for better thinking. When you don't have enough, all your money goes further because you will tend to make better decisions. Typically, media stories on this topic go for the most dramatic example they can. They write things like "Last year we bought a BMW back when we both had jobs. Now that we're both disabled, penniless, and having to darn other people's socks to earn pocket change, we eat ramen noodles six times a day, with extra salt to give it volume." Horse puckey! The vast majority of austere decisions are not so dramatic. They involve cents, not dollars, deferral, and deletion of stuff you didn't need in the first place. It's things like shopping at two grocery stores instead of one, and watching more of the prices more carefully so that you don't get snookered by fancy "profit-oriented" pricing of certain specialty items.

Let's get to the "no fun" claim. Having more money is certainly better than having less. Which leads directly to the contention that if being austere puts money in your pocket, then you are wealthier when you are not spending money! What could be simpler? Having money is a heck of a lot better than having none.

Austerity is more fun because saving resources is part of a game, and you can keep score with money. The higher your score, the wealthier you get. It is better for the vendors too, because now they get honest feedback. When their prices are too high, and stupid, they get whacked with inactivity and low sales. With fast feedback they can tune their own operations to be more efficient. Unless of course they are fat and lazy and feel entitled, in which case they can just throw a temper tantrum and whine about the need for new Keynesian spending by the government.

Austerity is more fun because when you cut spending, you cut marginal purchases that had low payoffs anyway. Whenever a business invests in new products, it gets worse results if it invests in all of the ideas than if it weeds out the bottom 90%. The same applies to consumer spending. If you buy everything on your wish list, your results will be worse than if you ruthlessly stick to only the top 10%.

Here is a trick comes from my own personal experience: Deferral of spending can save money by reducing purchases of things you stop wanting. If you have a wish list of things, and you wait six months, a number of items will drop from that list because you simply won't want them anymore. Imagine what this says about the payoffs from "I want it" types of spending: If 30% of what you buy ceases to be of interest or utility within 12 months, that is like losing 30% on your investments in a year. Certainly we can and should do better than that, and if austerity helps create discipline that allows us to weed out that 30%, then it is an incredibly useful tool indeed.

Naturally, part of the motivation for writing such an article as Livingston did could be political. It seems clear to me, at least, that setting aside any normative arguments, Keynesian spending that depends on this aversion to austerity is unlikely to create the desired outcome of improving the economy. As I have written before (Consumer Spending Will Not Save You), the outcome from Keynesian expansion government spending depends very strongly on the individual decisions of the recipients of the spending. Even worse, reinforcing the notion that austerity can be avoided by sugar-daddy spending by Uncle Sam will cause many small bad decisions to be perpetuated.

It has been said that virtue is its own reward. This is not just a hard-bitten saying. It is literally correct. When you save instead of spending, you have more money to spend later. When the requirement is that some types of fun avoid expenses, you find more of the free things in life that are excellent to experience. When you have the habits of thrift, you will go farther, see farther, enjoy more, get more from life, and appreciate your leisure pursuits more. In Shakespeare's As You Like It:

Sweet are the uses of adversity,

Which, like the toad, ugly and venomous,

Wears yet a precious jewel in his head;

And this our life, exempt from public haunt,

Finds tongues in trees, books in the running brooks,

Sermons in stones, and good in every thing.

Best to heed the bard.