Is spending an ethical duty?
In times of economic downturns, people have less income, so they spend less. Or is it the other way around? Perhaps when people spend less, there is less income – after all, every person’s income is the spending of some other person.
This little chicken-and-egg conundrum is at the heart of what economist John Maynard Keynes called the “paradox of thrift” – thrift on the part of an individual doesn’t always translate into investment in the economy as a whole. Normally, savings and investment are directly connected: Yael the dentist decides to eat out less often; the money she saves on restaurant bills accumulates in her bank account; the bank now has money to lend Zvi the restaurant owner; Zvi uses the money to expand his restaurant to accommodate future demand; the new demand is realized when Yael ultimately dips into her savings.
But sometimes the mechanism can backfire: Yael decides to eat out less this month; Zvi the restaurant owner now has less income, and decides to put off his dental work; Yael’s own income then contracts by what she thought she was saving. In this case, private saving translates into general contraction in the economy. In the end, Yael and Zvi passed up on consumption, but didn’t reap the benefits in increased savings.
When economists, or politicians, believe that we are having one of these “gloom” recessions, as opposed to downturns caused by some tangible misfortune, they are likely to try to stimulate the economy. The hope is that by putting a little money into the economy, for example through public works or tax cuts, you restore confidence and activity which ultimately finance the spending increase. (Self-financing spending increases are the liberal mirror-image of conservative self-financing tax cuts, and just about as realistic.) They may even tell you that “spending is a patriotic duty.” For example, as the economy began to show signs of a downturn in late 2006, President Bush stated bluntly, “I encourage you all to go shopping more”. (This echoed his request after the attack on the World Trade Center, when he asked Americans for their “continued participation and confidence in the American economy.”)
Now let’s get to the ethical part. Suppose you really believe your country faces a “gloom downturn.” You too are gloomy and cautious and would like to spend less. You recognize that if everyone thinks like you, the result will be a general downturn that will harm everybody. But if everybody cheers up and opens their wallets, “happy days are here again.” Do you in fact have an individual ethical duty to throw caution to the winds and spend more than you would like, hoping that others will do the same?
On the one hand, it seems like this is no different than scores of other civil-minded acts we do every day. If I cut in line, then I will get my errands done sooner, but if everyone does life will be harder for everybody – so I have an ethical duty to stand in line. If I skip voting, I will save time, and in any case my vote has no meaningful chance of changing the election, but if nobody votes our democracy will collapse – so there is an ethical duty to vote. The same goes for tipping, being polite, and so on.
On the other hand, all those other things don’t cost money, or at least not real money. After all, the spending-mongers are not urging you to spend the couple of dollars you might spend on gas to the polls or a tip at a restaurant; they want you toSpend.
My feeling is that there is no reason to make a special effort to spend, and certainly no one should get over-extended financially (that’s how we got into this mess in the first place), but we should strive to maintain our standard of living. This practice has the effect of putting a certain floor under psychological recessions; deciding that everything beyond subsistence is a luxury engenders a race to the bottom. As Thomas Malthus pointed almost two hundred years ago, “If every person were satisfied with the simplest food, the poorest clothing, and the meanest houses, it is certain that no other sort of food, clothing, and lodging would be in existence.” This approach is also supported by Jewish tradition, which states that while charity does not extend to luxuries, its goal is to keep people at their accustomed standard of living, meaning those things that are considered necessities for people of their standing.
Others may tell you that it is your duty to spend, or that it is a virtue to tighten your belt. My feeling is that we are under no obligation to spend ourselves out of a recession, but we also should not save our selves into one.