Increased consumer spending has become an obsession with the economic-recovery crowd.Such spending accounts for 70 per cent of the U.S. economy, as measured by the gross domestic product, or GDP.
Therefore, the thinking goes, consumer spending must rise if the economy and stubbornly high unemployment rate are to recover.
Some pundits even muse about consumer spending being a particularly American form of patriotism.
At the same time, personal incomes and consumer debt levels are not seen supporting any major spending surge. Even the widely welcomed boost in healthy holiday spending seems to have been fuelled by a worrisome drop in consumer spending and the assumption of more debt. The personal savings rate dipped late last year to 3.5 per cent, down from much higher rates earlier in the recovery.
Following the recession, the need to cut spending was widely hailed as a positive trend—the “new frugality”—and the financial equivalent of a fashionable black wardrobe. Now that the recovery is underway, it’s not clear that spending less money was anything but a matter of necessity.
Frank Newport, editor-in-chief at the Gallup polling organisation, says ongoing polling of Americans’ spending habits shows that a high percentage consistently say they want to spend less. However, this figure is not as high now as it was in 2008.
Less-frequently asked questions show that Americans say they continue to watch their spending closely and are not reporting meaningful changes in how many are cutting back their spending. On the contrary, about 64 per cent of Americans say they feel pretty good these days about the amount of money they have available to spend. That’s up from as low as 48 per cent last fall, Newport says, although he wants to see sustained improvement before calling it a trend.
While Americans wrestle with household budgets and spending impulses, behavioural psychology has found that spending money does not make people happier. Researchers Daniel Kahneman and Angus Deaton sifted through Gallup’s extensive polling data on health and well-being. People do feel better about their lives as their incomes rise, they reported in 2010, but their sense of emotional well-being seems to top out when their incomes reach about $75,000 a year.
“Low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health, and being alone,” they said. “We conclude that high income buys life satisfaction but not happiness, and that low income is associated both with low life evaluation and low emotional well-being.”
Joseph Chancellor and Sonja Lyubomirsky, in the psychology department at the University of California at Riverside, last year summarized research into what makes consumers happy. Their piece, in the Journal of Consumer Psychology, argued strongly that the new frugality represents an unusual opportunity to free people from material obsessions that actually detract from their happiness.
“The evidence suggests that a strong focus on acquiring money and possessions is detrimental to an individual’s well-being,” they said. Spending money produces short-lived positive emotions, but people quickly absorb the experience and its benefits fade.
“One enjoys a newly remodeled bathroom for a season, but over time it becomes less noticeable and brings fewer positive feelings,” their article said. “The bathroom that used to be new has now become ordinary and completely faded into the background of one’s conscious experience.”
Being frugal, they suggest, can improve personal happiness if people make a conscious decision not only to spend less but to focus on different priorities. “Broadly, studies suggest that individuals would greatly benefit from eliminating distressing debts, stretching positive experiences through appreciation and savouring, recycling positive experiences via variety and reminiscing, renting instead of buying, and resolutely focusing on intrinsic goals over extrinsic ones.”
Intrinsic goals involve activities that are emotionally rewarding and often involve family and friends, achievements, and feelings of social commitment and relevance. Extrinsic goals are more about money, fame, and other external appearances.