2009May9 Life in a Recession

2009May9 Life in a Recession

We have some good news and some bad news.  The bad news is that the recession continues its relentless grind on the economy and that a durable, long-term recovery may not happen for years.  The good news is that life in a recession can actually be quite enjoyable, as the prices of many of the things we enjoy tend to fall.  Recessions wreak havoc on our lives as business owners and investors.  But as consumers, we actually benefit from them. 

Consider some of these recent headlines:
 
Wall Street Journal, April 29, 2009
 
Dallas Morning News, April 24, 2009
 
“Restaurants Slash Prices to Attract Diners”
ABC News Online, May 4, 2009
 
We see the words “slash prices” repeated, and with good reason.  A Google search for that exact phrase returned 117,000 postings in just the last month.  The similar phrase “cut prices” returned more than 6 million!
 
Of course, it is fair to ask “What good are falling prices if our incomes are also falling?”  The good news is that for most Americans, incomes are not falling.  The unemployment rate is officially 8.5%.  Even if this is somewhat understated, approximately 90% of Americans still have jobs.   Furthermore, while companies might be a little stingier about awarding bonuses and raises, they are highly unlikely to actually cut wages and salaries if they can avoid it. 
 
Renowned economist John Maynard Keynes commented on the “stickiness” of wages during the Great Depression.  Despite an unemployment rate of 25% and massive deflation in the prices of virtually all consumer goods, wages for those Americans who kept their jobs remained stubbornly high.  This was bad for the owners of America’s companies, but it was quite good for those in their employ, as their standard of living rose while prices fell.  The deflation of the 1930s did far more to reduce inequality of income than the New Deal and its regulations could have ever hoped to do.
 
Our advice for the difficult years ahead is to live conservatively—keeping debts as low as possible.  But at the same time, do not be afraid to enjoy the benefits of falling prices.  Use your bargaining power as a consumer to increase your quality of life.