Joining the Cult of Austerity

It's not hard to see how changing circumstances can affect consumer behavior. When people lose their jobs or suddenly fall ill and don't have enough of a nest egg or other resources to fall back on, they have little choice but to rethink priorities and adjust their spending habits.

But emotions and attitudes can also have a big impact on whether people choose to spend or save, and whether certain goods and services are categorized as necessities or luxuries. During the good times, for example, millions believed that a caffe latte from Starbucks was an essential start to the day. For many Americans nowadays, that is no longer the case.

In fact, a growing number of reports suggest that attitudes are undergoing a broad-based shift. Rather than worshiping at the altar of consumerism, more and more people are joining the cult of austerity. BusinessWeek's Steve Hamm explores the issue in more detail in "The New Age of Frugality."

Americans' charge-it culture is getting an overdue reality check. But will the new discipline stick?

On a shady lane in New Hope, Pa., a quiet revolution in American culture may be taking shape. Here, a family of four lives in a white, colonial-style house in a manner that once would have been considered All-American but more recently has been seen as just plain weird: They're frugal.

Meet Leah Ingram, Bill Behre, and daughters Jane, 13, and Annie, 11. They walk most everywhere, they rarely eat out, they sometimes buy clothing at consignment shops, and they turn the lights off when they leave a room.

Theirs is no hard-luck-in-a-recession story. The Ingram-Behre family is solidly middle-class, fully employed, and not especially threatened by the conniptions gripping Wall Street. Behre, 43, is a dean at the College of New Jersey, while Ingram, 42, is a successful freelance writer and etiquette expert. They have no credit card debt.

That's now. A little more than a year ago, the family was ensnared in America's consume-at-all-costs culture. During the days of soaring home prices and easy credit, they took out a $101,000 home-equity loan on a previous house and spent lavishly on a lifestyle upgrade—going on three cruises in two years and taking the kids on annual pilgrimages to Disney World (DIS). "After 9/11 it became patriotic to shop, and we became as patriotic as anybody," laments Behre, sitting in the dining room after a meal of chicken stir-fry—washed down with tap water.

Ingram and Behre are harbingers of a dawning Age of Frugality. People who overconsumed during the past decade are now rejecting extravagant lifestyles. They're spending less, and more wisely. Some are getting their finances in order. Others are fearful of losing their jobs, shocked by investment losses, or hunkering down amid the general uncertainty.

The penny-pinching is already showing up in the numbers; this quarter could mark the first fall in personal consumption in 17 years. And with credit tight and Americans loaded down with $2.6 trillion in personal debt, consumer borrowing dropped in August, the first such contraction since 1991. Menzie D. Chinn, who teaches economics at the University of Wisconsin, figures consumers won't be in a position to spend freely for five years.

Which brings us to what John Maynard Keynes called the paradox of thrift. What's good for the individual, argued the famous economist, can ignite or deepen a recession. But that won't deter the newly thrifty. "I can't help the economy," says Kim Schultz, a resident of hard-hit Avoca, Mich., who with her husband, Jon, owes $40,000 in credit-card debt. "I've got to help myself." On the other hand, this newfound austerity could—emphasis on could—rewire Americans as savers rather than spenders. And that would help put the economy on a sounder footing over the long haul.

Thrift has gone in and out of style since the founding of the republic. In the McGuffey Reader of the 19th century, Benjamin Franklin was held up as a paragon of virtue for his frugal ways. Later, people who lived through the Great Depression were in some cases marked for life by the experience. Typical of them is Bernard Handel, an 82-year-old resident of Poughkeepsie, N.Y., who grew up poor in the Bronx. In the early 1930s, his father's grocery store failed and his dad couldn't find another job for several years. To this day, even though Handel became very wealthy, he shops for food with coupons, drives a Honda, and takes the subway rather than taxis. "I just don't believe in throwing money away," he says.

A RUDE AWAKENING
Handel's baby-boomer children grew up without psychological scars from the Depression. And the boomers' children have come of age in an era of abundance, easy credit, and a taste for luxury. So it's no wonder that the sudden need for thrift comes as an upsetting shock for many. Some are calling for a massive public education effort on the level of the anti-drunk-driving and anti-smoking campaigns that have been so successful. "We want to build a culture that's more hospitable to thrift, so it's not seen as odd but fostered and nudged along," says Barbara Dafoe Whitehead, co-author of For a New Thrift: Confronting the Debt Culture, a new report from The Institute for American Values, a think tank.

To be sure, there are odd moments on the journey to a thriftier lifestyle. To demonstrate, Bill Behre pulls out a mobile phone and twists it back and forth so the light glints off of rhinestones glued on by daughter Annie before she got a new phone. Behre's own phone was ruined in a rainstorm, so he's using this gaudy hand-me-down until he can get a free replacement in March. "This is the ultimate in frugal," he says.

It was Ingram who got things started. She was raised by a thrifty mother, but by the time she married Behre, mom's influence had worn off and she'd amassed $30,000 in credit-card debt. Controlling spending was hit or miss until the early 2000s, when the family embarked on a shopping spree.

Things nearly spun out of control after they upgraded to a better house. Despite raiding their retirement funds to help with the down payment, they ended up with higher monthly payments. Ingram remembers the day, May 24, 2007, they sold their previous home, and realized her family would take away only $60,000 even though the place had nearly doubled in value, to $490,000. "I was practically nauseated when I realized what our out-of-control spending had done," she says. She and Behre made a pact: They would live more frugally. Then they broke the news to the kids. No more cruises or Disney vacations. They'd get an allowance of $20 a month. And they'd be walking to school, the store, and friends' houses.

The girls were intrigued at first. Then they realized their comfortable, materialistic lives were really changing. Annie, whose shopping-for-pleasure habit had been indulged by her parents, suddenly had to make do at a secondhand store called Plato's Closet. Now the girls are resigned to this new way of life.

Sticking to the program requires vigilance. When Ingram does drive, she calculates the relative costs of traveling a few more miles to get gas for a few cents cheaper. And on the rare occasions they do go out to dinner, she feels guilty. "I want to keep myself accountable," she says. "I don't want to backslide." So far, the plan is working. In the old days, the family overspent their checking account by an average of $300 a month—dipping into the home-equity funds to make up the difference. Now they're in the black by about $800 a month. Since making their big changes, they accelerated payments on a car loan and managed to pay it off.

Ingram has started a blog, The Lean Green Family, where she encourages others to be more frugal. She and Behre say they've learned valuable lessons. One is to be flexible: Give yourself a treat every now and then. Another is to have a goal. They're saving for a new recreation room. "Being frugal is like dieting," says Behre. "It's more sustainable if you have a target you're aiming for."

As joblessness creeps up, many more Americans will receive their own crash course in frugality. It has already happened to Ned Penberthy, 53, a salesman who lives in Pelham, N.Y. He recently got a new job, took a cut in base pay, and has been living the frugal lifestyle ever since. Penberthy says he's in it for the long haul—willing to spend more up front to reap savings over the next several years. He installed expensive but energy-sipping CFL light bulbs in his house, and replaced some of his appliances with more efficient ones. For him, every penny counts. For instance, he switched from shaving cream to a bar of shaving soap. He figures he saves $6 a year that way. "It's not much, but there's a psychological benefit," he says.

Like a lot of boomers, Penberthy has a nest egg, but many people in their 20s and 30s have little to fall back on. To get on track, they have to learn the difference between necessities and discretionary spending. "They need to go back to [psychologist Abraham] Maslow's hierarchy of needs—food, clothing, shelter, and transportation," says Kristine E. Miele, a financial planner. She's offering "Lessons for Life" classes, gradually weaning young people off their spending habits one luxury at a time.

In the past, consumers have gone shopping the moment the sun came out. But this time? Market researchers trying to divine the consumer psyche are picking up signs that attitudes are changing. Booz & Co. recently conducted a survey of nearly 1,000 households. Among other findings, 43% of respondents said they are eating at home more and 25% said they were cutting spending on hobbies and sports activities. In both cases, most said they'd continue doing so even when the economy improves. Much the way pump prices have prompted many Americans to forsake SUVs for small cars, the collapse of home values and 401(k)s will make consumers think twice before hitting the mall.

For more on a new era of frugality in America, watch BusinessWeek TV. To see video clips or find your local station and airtime by Zip Code go to businessweektv.com.

(Hat tip to MS.)

Comments

[roger]

Sorry no empathy here.Its not only spending that's on the line
It's the whole outlook on life and our relation with our environment,
familial,social,a little humility & responsibility empathy and
respect for other cultures is sorely needed the understanding
that there is no #1 in life. that sacrifice (a dirty word in our society)
is sometimes needed

[Moopheus]

If people see the changes in diet terms ("I have to lose 20 pounds of debt") rather than in an overall lifestyle way ("I have to learn to live within my means") it won't really have any lasting effect. And yeah, as I think the poster above was saying, we also have to learn what living within your means implies on a global scale.

[donna]

We actually heard someone in Costco today explaining to his kids that their future college education was "more important than Daddy getting a new big screen TV".

Wow.....

[dukeb]

"On the other hand, this newfound austerity could—emphasis on could—rewire Americans as savers rather than spenders."

That line above from the article reminds me of George Bush's backwards praise to the Chinese government after a meeting with them years ago. GW congratulated them on starting to transform themselves from "a nation of savers to a nation of spenders." (I believe those were his exact words.) He just doesn't get it....even less so than his dad marveling at that new supermarket price scanner technology! But I don't blame GW or his encouragement that people go shopping after 9/11....as far as I know, nobody was forced into stores to make purchases at gun point.

[Lady From Middle America]

I'm curious to see how long this spirit of frugality will last. In other downturns, people held onto their cash for a while, then went on spending sprees due to pent-up demand. I think that only having the personal experience of suffering from hunger, starvation and homelessness (like during the Great Depression) will convince people to permanently change their spending habits.