Is Cheap the New "Cool"?

This is an interesting question that will not be answered for the next few years. It will take that long to figure out if there has been a permanent change in consumer behviour. But it is a question that is worth asking. The real issue is whether consumer behavior has changed sighificantly over the long term. Have people figured out that a house is a place to live and not an investment? Or have people figured out that eventually there is a natual limit to living beyond your means? Text in bold is my emphasis. From YahooNews.com:

When Jeff Yeager's book "The Ultimate Cheapskate" came out 18 months ago, he felt like a voice crying in the wilderness telling people to ditch their cell phones, hoard their pennies and pay off the mortgage.

Now the Internet abounds with self-proclaimed penny-pinchers offering tips on living frugally as the recession bites into America's shop-'til-you-drop lifestyle.

The rise of thrift may be bad news for a U.S. economy where in 2006 consumer spending accounted for 70 percent of gross domestic product.

"Cheap is the new cool," said Yeager, who also has a blog called "The Ultimate Cheapskate" offering advice on enjoying life more by spending less. An Internet search for "cheapskate" finds a string of similar blogs.

"When the book came out, it and I were viewed as quaint little novelties, but now it's being taken much more seriously," Yeager said.

When he advised people to focus on paying off their mortgage as soon as possible and stay in their first home forever, Yeager said his publisher warned him to tone down his "radical" ideas.
Now the subprime mortgage crisis has shown the fallacy of acting as if house prices always go up and people are saving like rarely before. Official data last week showed that U.S. savings jumped to a record annual rate of $768.8 billion, the highest level since records began in 1959, and the saving rate climbed to a 15-year high of 6.9 percent of income.

Yeager said it was discouraging that hopes of an economic recovery are pinned on consumer spending rather than manufacturing and production.

"Some of the lessons we should be taking away from this -- like we can't live on borrowed money, we can't live beyond our means -- part of the solution being put forward for getting out of this mess goes back to that," Yeager said.

It is a paradox that Lauren Weber, a journalist and author of the forthcoming book "In Cheap We Trust," a history of thrift in America, said is part of the national character.

Thrift, hard work and simple living were deeply embedded in America's early values, embraced by the Puritans and founding father Benjamin Franklin whose aphorism "a penny saved is a penny earned" is often invoked today.

"We're very confused," Weber said. "We're told that saving money is good for the soul, it's virtuous to save money. On the other hand, we're told it's basically unpatriotic, it's like burning the flag, to cut up your credit cards."

Credit card debt soared 25 percent in the past decade as consumers were flooded with offers of easy money, pushing spending up at rates that far exceeded wage growth.

In the last decade, American households piled on $8 trillion in debt, an increase of 137 percent, taking total consumer debt to around $14 trillion by late 2008, including home mortgages, credit and store cards and auto loans.

With the collapse of home prices and stock investments, consumers are changing their ways, at least for now.

Every industry from insurance to car makers has changed its marketing strategy to emphasize value, according to Fran Kelly, president of Boston-based advertising agency Arnold Worldwide.
But "cheap" is still a dirty word for many.

Arnold client McDonald's has boosted sales because of its inexpensive Dollar Menu and by adding fancy coffee drinks for much less than chains such as Starbucks.

"With McDonald's we're talking about a better coffee at a great price, but we never say cheap," Kelly said.

Price cuts are one way to boost sales, but businesses don't like to do that. Many are finding other ways to attract customers without actually cutting their prices.

"It's hip to get a deal," said Ginger Boyle, co-owner of Beverly Hills beauty salon Planet Salon. She has managed to boost sales by 14 percent through monthly promotions, but she said it's getting tougher as people want more for their money.

Two years ago, a new customer might get a free lipstick, she said. "That won't even work anymore. Now you bring a friend in and I'll give you 50 percent off on your next haircut."
While most retailers are suffering, thrift stores like Housing Works, a group that serves AIDS patients in New York, are more popular than ever.

Housing Works president Richard Vorisek, who has worked in the fashion industry for 20 years at big brands such as Polo Ralph Lauren, said sales so far in the financial year to July were up 10 percent, despite a fall in donated goods.

Housing Works, which specializes in second-hand designer merchandise, has nine stores in New York, including two that opened in the fashionable districts of Soho and Tribeca in the last four months, and it plans to open another in the fall.

"We're in expansion mode," Vorisek said.

The trillion-dollar question is whether the recession will mean a fundamental shift in consumer behavior. Weber, who spent several years researching her book on thrift, doubts it.

"Like most Americans I assumed that we were once a thrifty nation and we've become profligate," she said. "It's not true at all. We've cycled through this virtue of thrift over and over again in our history."

Retailers hope she's right. But Yeager, who also writes for environmental web site www.thedailygreen.com, said Americans might be a lot happier if they spent less time and money trying to accumulate possessions.

"We shouldn't be asking 'How do I get this stuff for less?' We should be asking 'Do we really need it?'" he said.

Yeager recalled a woman who came to a book signing event and berated him for his insensitivity about the recession, saying that if the economy did not improve she would have to cancel the family's cable television subscription.

"Half the world's population lives on less than $2 a day, and we're in a funk because we're going to have to give up cable service," Yeager said.