In the last few years, there have been many pages cropping up with tips on frugal living. I have also shared my views and practices in my previous post, on frugal living. However, since every micro-economic decisions has its implications to macro-economy and vice versa, I’m trying to offer here a different perspective.
Frugal living is based on the concept of reducing expenditures while maximizing one’s health and economic benefits. It is based on identifying the necessary expenditures from unnecessary expenditures and to act smartly. However, such acts, is also likely to reduce demand for products, which are likely to result in increase in unemployment as the owners and CEOs try to max-out their profits at the cost of employees, curb innovation, etc. These consequences would likely reduce Governmental income, which would increase the debt-to-GDP ratio (as GDP would reduce due reduction in demand) leading the country into the vicious cycle of austerity. This is depicted in the following graphic.
A Simple Case Study - eschewing smartphones:
In my perspective, avoiding smartphones (cell phones, if possible) is one of the easiest ways of saving money and probably have enough to invest. However, when the demand for smartphones reduce, first the low cost manufacturers followed by the premium phone manufacturers would see a reduction in demand. This will force them to optimize their investments in a such a way so as to maximize their profits. One of the easiest ways to do that is laying-off employees. They would save money from the salaries of the laid-off employees as well as the exploitation of current employees. When there is a fear for lay-off the current employees tend to cling to their jobs by putting on more hours and working during weekends/holidays. This increase in unemployment is likely to affect the country’s economy adversely (though not that of the CEOs’ or the boards’). Further, in their effort to prioritize investments, they would also cut funding to many research programs, resulting in unemployment and loss of innovation. Further, app manufacturers, game developers, etc. would lose their market, leading to further unemployment. This would have adverse effect on economy as unemployment and debt-to-GDP would rise. Thus saving some bucks by avoiding a product is likely to throw-up people in streets without jobs.
Finally, for people wondering where do I stand, I stand with frugal living. Why? I’m in search of a job and I simply cannot afford otherwise. On the other hand, I strongly believe that the rich should spend more (preferably proportional to their asset) but in general, it is the poor who is spending more all over the world!