Judging by the traffic on the Planet Money blog, many people are wondering if now is the time to be spending money. On the one hand, we hear that the economy is crashing because of a decline in consumer spending. On the other hand, we hear that the economy is crashing, which frightens us to consuming less and saving more for the rainy days ahead. Real economists worry about these things, too – see Paul Krugman and Tyler Cowen, for example. But at the end of the day, all economists can do is speculate and watch what happens, because aggregate consumption is just the sum of hundreds of millions of individuals making their own purchasing decisions.
I’m not a personal financial advisor, but I think this can be broken down logically. Let’s assume that, before the current downturn, you chose with your level of spending (and, by implication, your level of saving) rationally. Then there are three main reasons why you might want to reduce spending today: (1) you don’t have the purchasing power you need to maintain your spending; (2) you are going to lose your job (I know there’s a problem with that statement, and I’ll come back to it); or (3) the assets you are counting on for retirement have fallen enough that you need to increase savings in order to replenish them.
The Baseline Scenario 