“There’s an Old Consumer and a New Consumer…The Old Consumer borrowed eagerly and spent freely. The New Consumer saves soberly and spends prudently,” explains Robert J. Samuelson from The Washington Post. In a post-financial crisis world, 65 percent of consumers prefer saving money to spending it according to a gallop poll.
This decrease in consumption spending has affected many areas of the economy as well as the mindset of consumers, “people got a cruel lesson about [the dangers] of debt,” says U-M Professor of Economics Matthew Shapiro. However, despite all of the negative affects that consumer savings have caused as outlined in this article, this increase could also be increasing a consumer’s financial confidence and willingness to spend at an increasing rate.
Read the original article from The Washington Post, "The economy's real drag: Us."
Read the study by Claudia R. Sham (PhD '07), Matthew Shapiro and Joel Slemrod, “Balance-Sheet Household and Fiscal Stimulus: Lessons from the Payroll Tax Cut and Its Expiration,” as referenced in the original article.
Balance-sheet repair drove the response of a significant fraction of households to fiscal stimulus following the Great Recession. By combining survey, behavioral, and time-series evidence on the 2011 payroll tax cut and its expiration in 2013, this papers identifies and analyzes households who smooth debt repayment. These “balance-sheet households” are as prevalent as “permanent-income households,” who smooth consumption in response to the temporary tax cut, and outnumber “constrained households,” who temporarily boost spending. The asymmetric spending response of balance-sheet households poses challenges to standard models, but nonetheless appears important for understanding individual and aggregate responses to fiscal stimulus.