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Could personal frugality and responsible household spending be bad for Canada's economy? If we interpret a position the Conference Board of Canada is taking in response to predictions that this country could suffer serious side effects from the economic malaise that is gripping our southern neighhbours, that would seem to be part of the CBC's message.
The Ottawa-based board, which ostensibly provides non-partisan analysis and research on economic trends, has come to the conclusion that one of the things that could impede Canada's economy most from recovering in the event of a prolonged recession is bad news about the economy itself.
Psychology and spending
Coming from the CBC, there is nothing actually new in this angle. In a commentary last October entitled 'The Psychology of Recession,' the board's chief economist Glen Hodgson wrote that if consumers and investors are influenced by all the recession talk in the media, adopt a more negative attitude, and suffer a drop in confidence, then they are less likely to buy and invest and make long-term decisions.
"The psychology of recession becomes a self-fulfilling prophecy," he said, while adding that the "hyberbolic tone of recent news coverage" is one of the factors that "are almost certainly causing consumers to overstate their concerns … Psychological forces mean that we may be over-reacting to the bad news." However, going against the conventional wisdom that experience is often the best teacher, Hodgson reasons that older adults may project their bad personal experiences from previous recessions onto current circumstances, leading to "a magnified fear of recession" among the younger generation.
Caution to the wind?
For examples, he harks back to the most serious recessions Canada experienced in recent times, during the early 1980s and 1990s, while ignoring the catastrophic Great Depression of the 1930s, which is remembered with trepidation by those few still around who lived through it. But if we read the overall message correctly, the young, according to the CBC's analysis, would have everything to lose if they emulated the cautious response of their elders to an impending recession. All the same, as Hodgson notes, there is still not a lot to become alarmed at, since the latest figures show Canada's unemployment rate still stands at under 7 per cent, which is less than half the jobless level of the 1980-81 recession.
While the present position of governments around the world with regards to their economies is most likely still one of not knowing, their almost unanimous response has been to commit unprecedented amounts of public funds for "economic stimulation," even though there is relatively little historical basis to justify it, except for the successful Depression-era actions of liberal democrats like Franklin Delano Roosevelt in the U.S. and Mackenzie King in Canada. But the fact is nobody knows for certain if the trick can be repeated, and the consequence is that taxpayers will be on the hook for unprecedentedly massive deficits.
Worse things than recessions
It is perhaps best to keep in mind that there actually are worse things than economic recessions or depressions. Epidemics of disease, deadly hurricanes and devastating earthquakes number among them. The people of New Orleans would probably have given anything if they could have opted for an economic downturn, in place of the natural one they had to endure when they were assaulted in 2005 by Hurricane Katrina. However, if reckless spending and loose credit are bad for the individual, they are equally bad for a whole economy, and our governments are in lockstep with that trend.
If they are devoting so much of their economic recovery plans to restoring a smooth flow of credit, it is proof of how dependent our economies have become on that economic aspect. It upholds a higher standard of living for consumers, while ensuring the integrity of the economy as a whole through the public's continued spending. At the same time, the government's intervention assures their continued votes. However, when Canadians tighten their belts in response to news that their jobs are threatened by a serious economic downturn, psychology be damned, they are not to blame if they do the logical thing by becoming frugal, cutting back their spending and wanting to protect their interests.
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