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Could Americans saving more and spending less rescue the US economy?

The conventional wisdom is that the US economy won't recover until consumers start spending freely again. But some economists say Americans saving their money may be more advantageous.

By Husna HaqCorrespondent / April 2, 2010

Joana Husain (now unemployed) and her husband, of Westborough, Mass., now host potlucks instead of lavish dinner parties to spend less and traded their BMW for a Toyota to save more money. The Husains, along with other Americans following this financial path, could be helping the US economy recover faster.

Taylor Weidman/The Christian Science Monitor

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Before the recession, Joana Husain drove a BMW, hosted lavish parties, and frequently vacationed with her family at pricey theme parks. Fifteen months later, she's cut back drastically.

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After losing her job as a human resources coordinator at EMC Corp. in Hopkinton, Mass., Ms. Husain traded in her BMW for a Toyota, began holding smaller potluck parties, and swapped Disney World vacations for family road trips.

Ironically, losing a well-paying job has helped Husain and her husband get their finances in order. They've scrutinized their budget, pared expenses, and started saving more – even on half their previous household income.

"We're cutting down a lot.... [The recession] taught us we need to save more for times like this," says Husain, who lives in Westborough, Mass., with her husband and two sons. "Even saving $20 or $30 a month can add up to a lot." And with a third boy on the way she says, "I'm sure we'll have to tighten our budget long-term."

The recession has brought about a seismic shift in Americans' financial habits, coaxing scores of former spendthrifts to save.

Roughly 6 in 10 Americans now say they prefer saving to spending, according to a recent Gallup poll. And although Americans still have one of the lowest savings rates in the world, they are saving more: Americans saved 5.4 percent of disposable income in the second quarter of 2009, when the recession was near its peak.

By contrast, the savings rate was less than 2 percent in all of 2005 when access to easy credit, sophisticated marketing campaigns, and a culture of consumption lured many Americans to the malls.

Based on conventional wisdom, Americans' newfound penchant for thrift is good for them but bad for the economy. But some economists assert saving more can actually improve the economy in the long run.

Whenever the economy goes sour, consumers are often bombarded with messages to spend, spend, spend, to stimulate the economy.

"If you can afford it, then this is exactly the moment to redo your kitchen or buy a car," wrote Harvard economics professor Edward Glaeser in a 2009 New York Times article titled "If you got money, it's time to spend some." "Not only will you be able to get a good deal, but your spending will help revive the economy."

And on more than one occasion, former President George W. Bush encouraged Americans to shop to spur the economy. It's a familiar refrain throughout history, says Lauren Weber, author of "In Cheap We Trust."

"Everyone's telling us we're doomed unless consumers start spending," says Ms. Weber. "American history is filled with these times when [saving] is demonized and those who do are told they are endangering the American way of life."

Consumption-mongers may be right, to a point.

In a consumer-driven economy like the US, consumption typically makes up 70 percent of gross domestic product (GDP). But as consumers slashed spending and boosted savings during the recession, consumption as a percentage of GDP began dropping. It will be 65 percent of GDP by 2015, according to some reports – and that has some people worried.

It's a problem known as the paradox of thrift, the theory that individual thrift leads to collective misfortune, an idea first proposed by English economist John Maynard Keynes.

One person's spending is another person's income, the theory goes, so if everyone decides to save money by, say, eating out less, someone else loses that income (like restaurants).

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