The Savings Controversy
In recent years, there has been the constant question of whether we should be saving or spending in regards to helping ourselves and the economy. Furthermore, with interest rates so low, economists are urging people to borrow money instead of saving. Saving may be decreasing aggregate demand since there is less money going into the overall flow, and thus the economy would be contracting. Some extremists may even argue that by saving your money you're depriving other of employment because you're contracting the economy. This whole notion is know as the "paradox of thrift"
On the other hand, savings is constantly being encouraged by the government, with incentives such as tax breaks on pensions. Also, saving is absolutely necessary for expenses such as college and later retirement. Additionally, it is commonly know that savings are imperative in leading to investment which helps stimulate the economy and further growth.
Evidently, it is a difficult concept to juggle in terms of what is the right thing to do. Usually, when one sector is running a deficit, the other must be experiencing a surplus and vice versa. This is true within an economy, as well as globally with economically related countries. The article discusses how causality is the main issue in producing this effect. When the economy is good, tax receipts increase and unemployment benefits decrease. When the economy is in a slump, the opposite effects happens. Furthermore, it is important for economic analysts to be able to differentiate between the cyclical stages in order for the economy to know how to respond in terms of policies, etc.
Overall, the important takeaway is that we are constantly debating between what we want. We don't want too little and we don't want too much. We want our savings to be spread out instead of lumped into the same couple of areas. In terms, of consumer spending, it is imperative that individuals save! The overall economy should be more concerned with what mode to be in rather than the individual consumer.
http://www.economist.com/blogs/buttonwood/2015/10/economics
5 comments:
I think your points on this topic are very intuitive! Consumer spending is all based on future expectations of the market. In economics we have learned that if consumer spending is expected to be high in the future, people tend to spend more. I believe we can conclude from this article that confidence within the marketplace is positively related to expectations on future consumer confidence levels.
I agree with Austin. If there are reports saying consumer confidence is high, people are more willing to spend. Everything is done via public opinion or what other people are doing. So if they see people saving more because they're worried about the economy, more people are wanting to save.
I definitely think saving is the way to go. However, that is obviously not always the option or the case. But if we discourage saving, that sends the wrong message to consumers about the economy and about their futures.
So it seems like the saving vs. consumption debate on a national level is exactly analogous to saving/spending at the individual level. It is all about which time frame you are looking at. Consumption provides utility in the short term, but has consequences for the long term (poor GDP growth is the consequence at the national level). Meanwhile, saving is counter to desires of the short term, but raises wealth and spending ability in the long run.
Since 2008, people have been less likely to save and more likely to take out loans. I think we are just at the turning point of starting to increase saving as we are becoming more confident in the economy. More will be to come on this after the Fed and Yellen make a decision as to whether increase interest rates in December. This will then encourage more people to save.
It is a very interesting debate as both are good and bad for the economy. There must be a balance between the two for the economy to survive as if all is spent, there is nothing for the future to spend and nothing to invest. If all is saved then there is no economic activity. There must be a balance between the two. It is difficult to find the optimal balance between the two so this debate will always be unsolved especially since it relies on individuals spending and savings habits.
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