When I advocate for frugal living, people sometimes ask, "What if everybody lived like that?  Wouldn't it hurt the economy?"  My natural inclination toward frugal living may color my opinion, but I don't think so.  I think mass frugality would be good for the economy.

It's a valid concern, rooted in the way recessions and depressions start.  Some recessions are business-led, with businesses cutting back first and consumers following because their paychecks are smaller and they can see that their jobs are at risk.  Others are consumer-led, with consumers cutting back first and businesses responding to falling sales with layoffs.  Either one, of course, leads directly to the other, and there's no automatic mechanism to stop the downward cycle.

So, the question is:  If everyone suddenly decided to be more frugal, would that look like a consumer-led recession, with  falling sales leading to layoffs, and layoffs leading to cash-strapped consumers choosing to be even more frugal?

It's a question that's hard to answer.  If everyone were a bit more frugal, yes there probably would be a bit less total economic activity.  (Xin Lu lays out this case in her post from a few months ago, What if everyone suddenly became frugal.)  I think, though, that the exact result depends a great deal on the economic situation at the moment the change takes place.  It's kind of like hesitating before giving someone an aspirin:  Won't it cause his temperature to fall?  Well, if he's got a fever, yes it probably will.  Otherwise, probably not.  In much the same way, if the economy is overheated, then a shift to frugality will probably slow it down.  If the economy is underperforming, I don't think a shift toward frugality will make a big difference--if everyone is already reduced to focusing on just the necessities, becoming more frugal isn't much of a change.

So, the downsides may be real, but I think they're small.  On the other hand, if everyone is more frugal, the upsides are potentially huge.  A lot of the harm in a recession comes from fear.  The people who are unemployed have less money to spend, but even people with jobs start to cut back, simply because they're nervous.  Frugal people are less vulnerable to this.  They have less debt, more savings, and more room in the budget to handle a drop in income.  They don't panic when their neighbor loses his job--because they don't need to.  The result is that the frugal household is more stable.  And a community of stable households is a more stable community.

Any change in consumer's tastes--deciding that they want less of anything, whether it's VHS tapes, camera film, or incandescent light bulbs--is hard on the businesses that produce those things.  But it doesn't kick off a downward spiral, because there's a natural point of stability:  the point where the consumers are buying whatever it is they now want.  The shift to more frugal consumption patterns would be like a change in tastes, not like the beginning of a recession.

So, I feel comfortable advocating frugality.  We may lose a bit of economic activity--but what we lose is worth losing.  What we gain is more secure households and a more sustainable economy.  It seems like a win to me.