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As layoffs and store closures grip Boise, these two local families hope their newfound frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decadeslong buying spree, are finally saving more and spending less — just as the economy needs their dollars the most.

Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation’s standard of living. But in a recession, increased saving — or its flip side, decreased spending — can exacerbate the economy’s woes. It’s what economists call the “paradox of thrift.”

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century.

“The idea that the American family will quickly spend us out of this recession is a fantasy. It won’t happen,” said Elizabeth Warren, a professor of law at Harvard University who last month was named chair of the Congressional oversight panel tasked with overseeing the distribution of the government’s Troubled Asset Relief Program funds.

In Boise, families like the Capps and Muirs illustrate the paradox. This metropolitan area at the foot of the Rocky Mountains is home to a half-million people and is a base for electronics manufacturers such as computer-chip maker Micron Technology Inc. The area weathered downturns in the early 1990s and 2001, with unemployment rates remaining well below the national average. But now people here are socking away money they once would have spent, contributing in part to failing stores, shuttered restaurants and rising unemployment.

In 2003, the Capps moved to Boise from Swisswater, Pa., after Mr. Capp received an offer to work for Electroglas Inc., a company that makes equipment used in producing semiconductors. Pay for his field-service engineer job started at $65,000, and Boise’s cost of living was lower than Pennsylvania’s. Rick and Noreen and their two children — Noah, now 13 years old, and Ellen, now 16 — were excited to ski in the Rockies instead of the Poconos.

Move to Boise

The Capps sold their Pennsylvania home for $164,000 and bought a slightly larger, 2,200-square-foot home on a cul-de-sac in the Boise suburb of Meridian. They financed the $175,000 home with a 30-year mortgage, at a fixed rate of 5.8%.

Their children settled in well: Ellen sings in the school choir at Meridian High School, while Noah went to a local charter school and signed up for the chess club. In 2006, Mrs. Capp, now 45, finished her bachelor’s degree in psychology from Boise State University, and began working part-time for a mental-health clinic, earning about $10,000 a year. Mr. Capp, 44, also took classes at BSU.

Four years ago, the Capps took out a $25,000 line of credit on their home and used it to buy a large sectional couch for their family room and a used Toyota 4Runner, to go along with the family’s 1995 Toyota Corolla. Over the years, they also built up about $11,000 in credit-card debt and $40,000 in student loans.

But given the rising value of their home and of Mr. Capp’s stock options, their debt didn’t seem alarmingly high, they said. As the resale value of their home reached nearly $300,000 in 2006, the family took trips to Disneyland, paid $900 for ski passes and signed Ellen up for fiddle lessons.

That all changed quickly. The housing market in Boise started to turn downward at the end of 2006, followed by the stock market and the economy. Around the end of 2007, Mr. Capp’s employer began laying off some of its field technicians as customers put off servicing their equipment. “It’s just been one thing after another,” says Mrs. Capp.

The Capps started cutting back. In late spring, they began to trim their spending and paid down about half of their $11,000 credit-card debt. This summer, they used more than half of their government stimulus check, about $1,000, to open a savings account with an attractive interest rate of 5%.

“We never go downtown anymore,” says Mrs. Capp. “We’re trying to consume less gas, less electricity, less food. It’s across the board.”

Even the family’s cable-TV subscription didn’t escape the scalpel. “It’s been killing me because I don’t get the Cartoon Network anymore,” says Noah, a shaggy-haired teen. “I’m missing so many new shows.”

Community Impact

The impact of such decisions is visible around Boise. At Home Federal Bancorp, a $725 million bank with 15 area branches, the number of new savings accounts was up by 26% in December from the previous year, said Steve Eyre, the bank’s head of consumer banking. He said the bank is also seeing people save in their checking or money-market accounts. “It’s pretty interesting to see those balances actually increase at a time when there’s higher unemployment,” he said.

Meanwhile, many downtown restaurants have closed this year, including a number of locally owned eateries. Satchell’s — a family restaurant that was the Capps’ favorite — is gone, as are Zutto Japanese Restaurant, the 8th Street Wine Company, Mortimer’s Idaho Cuisine, Gino’s Grill, the MilkyWay and a French place called Andrae’s. Retail store closings have become so pervasive that the sign outside one surviving store, Dick’s Stereo, now proclaims “WE ARE STILL HERE.”

National retailers are pulling out as well. The Boise Towne Square, the region’s primary shopping mall, is losing one of its anchor tenants, a Mervyn’s department store. A furniture store across the street has also gone out of business. A nearby plaza has lost its two main tenants — Linens ‘n’ Things and Circuit City — as both liquidate nationwide.

Unemployment in the Boise area is still below the national average of 6.7%. But the rate has risen swiftly, to 6% in November 2008 from just 2.7% a year earlier. Unemployment is expected to climb to at least 8% by 2010, according to Moody’s Economy.com, about the same rate forecast for the nation as a whole.

By October, Mr. Capp, too, was out of work. His employer, Electroglas, trimmed its North American work force of field technicians from more than a dozen when Mr. Capp started to just four after he and several colleagues lost their positions, he said. Electroglas, based in San Jose, Calif., declined to comment.

With a severance package of about $10,000, the Capps say they paid off their remaining $6,000 in credit-card debt and have been living off the dwindling remainder.

Keeping the Old Car

Frugality has become a family responsibility. Mrs. Capp, a friendly and effervescent woman, nixed replacing her Toyota Corolla, even though it has 253,000 miles on it, a cracked windshield and Hawaiian-print covers over its splitting seats. The Capps have given up on skiing this year. Disposable paper towels have been replaced by washable rags.

Ellen’s college options are also limited. The family hadn’t started saving for college before the downturn and can’t put away enough money now. “We’re really pushing her toward scholarships or anything that can help pay for it,” says Mrs. Capp. They’ve considered having their tall, lanky daughter try modeling, but portfolio shots cost a couple hundred dollars.

Jessica Muir, too, would like to be socking money away for her children’s college educations. But the 31-year-old mother of three says she also can’t afford it now.

Jessica and Alan were high-school sweethearts in Caldwell, a small community near Boise. They married young. Mrs. Muir worked as a dental assistant before the couple’s first child, Gavin, was born five years ago. In 2006, Mrs. Muir gave birth to twins.

The same year, they bought a modest two-story home in Nampa, part of the Boise metropolitan area, with enough room in back for a vegetable garden. Unable to afford a 20% down payment, they took out two mortgages to buy the $144,000 home. Mrs. Muir cashed in her 401(k), using the roughly $3,000 to pay for insulation and a fence. The Muirs figured they’d get their money back when they sold the house for a higher price a few years later.

IRA Hit Hard

It hasn’t worked out that way, with real-estate prices falling along with the rest of their investments. Alan Muir’s government job as an Agriculture Department grape researcher is more secure than most, but his combined 401(k) and individual retirement account is down by about half, to $13,000.

To pare back, Mrs. Muir started “the Moneysavers Club,” an email group of about 30 people. The members alert each other about deals such as $8 winter coats at Old Navy, and they split bulk purchases of sugar and other staples. Mrs. Muir stores food in her garage, including vegetables she’s grown and canned herself. When she saw a great deal on eggs recently she bought 10 dozen, which she cracked into ice-cube trays, froze and transferred to bags for cold storage. “Not many people know eggs freeze,” she said.

She also sells hand-crocheted hats and scarves on Craigslist and at local bazaars, bringing in $85 on a recent weekend. Her husband, meanwhile, charges $20 an hour for guitar lessons on Wednesday nights, and takes trips into the Rockies with friends to cut firewood for the family’s wood-burning stove. The couple also recently split the $600 cost of a yearling calf with Mrs. Muir’s parents, who are raising it on their land in Caldwell. They plan to butcher it and eat the meat.

The cutbacks by the Muirs and others their age mark a particularly profound shift. In the American buying spree of recent years, the most profligate spenders were those under 35. As recently as 2006, for every $100 these Americans earned, they spent about $117. Those aged 35 to 55 had negative saving rates nearly as large. Only the large number of Americans 55 and older, who have always had high double-digit saving rates, kept the overall saving rate above zero, according to data from Moody’s Economy.com and the Federal Reserve.

Several factors are now pushing saving rates upward, including tighter restrictions on credit and home borrowing. Growth in consumer credit slowed to 1.2% at an annual rate in the third quarter, the Fed said, far lower than the 3.9% pace in the prior quarter.

The Muirs and Capps, like many Americans, also reined in holiday spending this year. Mrs. Muir started her shopping in July to snatch up bargains.

Mr. Capp didn’t want to spend any money at all on family gifts this year. His wife persuaded him that they could spare a few hundred dollars.

The Capps ended up spending about $370 in all, down from about $350 a person in previous years. Rather than spending Christmas day opening one gift an hour — a Capp tradition — they invited neighbors over to play the Nintendo Wii video game that was a Christmas gift for the whole family.

Chertoff said the criminal activity in Mexico, which has caused more than 5,300 deaths in the last year, had long troubled American authorities. But it reached a point last summer, he said, where he ordered specific plans to confront in this country the kind of shootouts and other mayhem that in Mexico have killed members of warring drug cartels, law enforcement officials and bystanders, often not far from the border.

“We completed a contingency plan for border violence, so if we did get a significant spillover, we have a surge ? if I may use that word ? capability to bring in not only our own assets but even to work with” the Defense Department, Chertoff said in a telephone interview.

Officials of the Homeland Security Department said the plan called for aircraft, armored vehicles and special teams to converge on border trouble spots, with the size of the force depending on the scale of the problem. Military forces would be called upon if civilian agencies like the Border Patrol and local law enforcement were overwhelmed, but the officials said military involvement was considered unlikely.

The two countries are mentioned in the same breath in a just-published study by the United States Joint Forces Command, whose jobs include providing an annual look into the future to prevent the U.S. military from being caught off guard by unexpected developments.

“In terms of worst-case scenarios for the Joint Force and indeed the world, two large and important states bear consideration for a rapid and sudden collapse: Pakistan and Mexico,” says the study – called Joint Operating Environment 2008 – in a chapter on “weak and failing states.” Such states, it says, usually pose chronic, long-term problems that can be managed over time.

But the little-studied phenomenon of “rapid collapse,” according to the study, “usually comes as a surprise, has a rapid onset, and poses acute problems.” Think Yugoslavia and its disintegration in 1990 into a chaotic tangle of warring nationalities and bloodshed on a horrific scale.

Nuclear-armed Pakistan, where Al Qaeda has established safe havens in the rugged regions bordering Afghanistan, is a regular feature in dire warnings. Thomas Fingar, who retired as the chief U.S. intelligence analyst in December, termed Pakistan “one of the single most challenging places on the planet.”

This is fairly routine language for Pakistan, but not for Mexico, which shares a 2,000-mile, or 3,200-kilometer, border with the United States.

The system, which is being trialled in a UK school next week, can also be used to allow children to take out library books and buy their lunch.

It is among a host of high-tech security measures introduced in schools in a bid to keep pupils safe.

Some schools have brought in fingerprint and eye scanners, while others are planning to put radio transponder chips in pupils’ uniforms to keep tabs on them.

But there are fears the technology breaches children’s civil liberties.

One school installed an iris scanner in 2003 but removed it a year later after it failed to recognise some students and led to lengthy queues.

Aurora, a Northampton-based biometric firm, will exhibit its new “face recognition software” at an education technology conference in London next week.

The company has developed a prototype aimed at schools for “ultra fast student registration, easy cashless catering and secure access control”.

Each system – costing around £1,000 – can verify a face in 1.5 seconds and claims to be more accurate at identifying people than a human.

Patrick Usher, the company’s technical director, told the Times Educational Supplement that adapting the technology for children was a challenge as their faces changed quicker than adults.

John Dunford, general secretary of the Association of School and College Leaders, said the system would be welcomed if it cut bureaucracy – but he said: “You always seem to get queues behind security devices”.

Guidance issued in 2007 gives headteachers permission to collect pupils’ biometric data to use when taking the register, paying for lunch or using the library.

But civil liberties campaigners are concerned that the data could be given to police or the Government without parents’ knowledge – or stolen by identity thieves.

“Consumers are now going to get more and more scared at the prospect of losing their job,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. Obama’s proposed fiscal stimulus “needs to be big, needs to be bold, needs to be swift. If they can do something quickly we can limit the hemorrhage by mid-year.”

The Labor Department reported that the nation lost 2.589 million jobs in 2008, with the unemployment rate climbing more than economists forecast, to a 15-year high of 7.2 percent in December.

Today’s figures will intensify pressure on U.S. lawmakers to speed Obama’s recovery program, which may exceed $775 billion, through Congress in an effort to save or create 3 million jobs. They also underscore the urgency of the Federal Reserve’s $200 billion initiative to restart consumer financing markets that’s scheduled to begin next month.

The initiative, which is being coordinated with President-elect Barack Obama’s transition team, may be taken within days, the sources said, speaking on condition of anonymity because no announcement has been made. But it remains unclear who would wield any veto. While Obama transition officials prefer that current administration issue it, the White House is declining to address that question.

Democratic Senate aides were notified in a meeting this afternoon that the request could come as soon as this weekend and that a vote could be held as soon as next week, congressional sources said.

Under the emergency rescue legislation approved by Congress in October, the administration must inform lawmakers that it wants access to the second installment of $350 billion. Unless Congress passes a resolution rejecting the request within 15 days, the Treasury can begin to tap the funds. If Congress does turn down the request, the president could veto the resolution and then the Treasury could proceed.

…

With little more than a month’s worth of cash left in the state treasury, the governor and lawmakers have been unable to agree on how to erase a budget gap projected to reach $41.6 billion by the middle of next year. Democrats announced Tuesday that two weeks of discussions had ended in an impasse and sent Schwarzenegger the $18-billion fiscal package they passed last month. The governor vetoed it, as he had promised to do.

State Controller John Chiang has said that as early as Feb. 1, his office may begin issuing promissory notes if lawmakers have not resolved the budget crisis. The state has done this only once before since the Great Depression — in 1992.

“We have not made any decision about deferring payments or using IOUs, but they are possibilities if the governor and Legislature don’t come to some agreement soon,” Chiang spokeswoman Hallye Jordan said Tuesday.

Under the state Constitution, schools and bondholders get first rights to any cash in the state’s coffers.

Oil dropped as much as 5.6 percent after the government said the world’s biggest energy-consuming country lost 2.589 million jobs last year, the most since 1945. U.S. supplies have climbed in 13 of the past 15 weeks as the economy slowed, according to the Energy Department. Prices in New York touched $32.40 in December because of rising stockpiles and lower demand.

“We are going to test the December lows because the numbers we see are horrible,” said Kyle Cooper, an analyst at IAF Advisors, an energy-consultant in Houston. “It seemed that Russia, China, India and Brazil were immune to the economic problems here, but that’s no longer the case.”

Crude oil for February delivery fell $2.16, or 5.2 percent, to $39.54 a barrel at 11:08 a.m. on the New York Mercantile Exchange. Oil is heading for a 15 percent decline this week after gaining 23 percent the week before, the most since August 1986.

An accelerating pace of job losses towards the end of the year pointed to a bleak start for 2009 and increases chances the economic downturn could become the longest since the 1930s.

The Labour Department said on Friday the jobless rate jumped to 7.2 percent, the highest level since January 1993, from 6.8 percent in November. Economists had expected a smaller rise to 7 percent.

The surge reflected another month of deep job losses. Employers cut nonfarm payrolls by 524,000 in December, a bit less than analysts had predicted, but jobs losses for October and November were much greater than estimated earlier.

…

Spain is now in company at last with Germany, where exports plummeted 10.6pc in November. The German economy is highly-geared to the global industrial cycle and is suddenly facing a vicious downturn as demand for machinery slumps in China, Russia, the Mid-East, and equally important as car sales crash in Italy, Spain, and Britain. The country’s trade surplus has shrivelled by a third in one month.

“Industry is in free-fall,” said Dirk Schumacher, from Goldman Sachs. Germany’s industrial orders have plummeted 27pc year-on-year, heralding a drastic economic contraction this year. Berlin is mulling a €100bn fund to rescue companies in distress, on top of its €50bn Keynesian blitz over two years. The fiscal package includes tax cuts and infrastructure spending. Chancellor Angela Merkel’s coalition has backed away from plans to `tough out’ the recession after a fierce criticism from German economists and industrial leaders.

Berlin is now preparing the part-nationalisation of Commerzbank by taking a 25pc stake in exchange for a €10bn infusion of capital, helping to boost the bank’s capital ratio as it digests Dresdner Bank. Commerzbank shares fell 14pc. France is also drawing up plans for a fresh €10.5bn capital injection for its banks.

Jacques Cailloux, from the Royal Bank of Scotland, said the pace of contraction in Europe is now disturbingly close to levels seen in the Great Depression. The eurozone bloc shrank by 3pc in 1930, 5pc in 1931, and 4pc in 1932.