Question by treetop: How can consumer spending and a high personal savings rate both be good?
High consumer spending is pitched as a good thing for the economy. But so is a healthy personal savings rate. Since these two are opposing, how can they both be good for the economy?

Best answer:

Answer by simplicitus
Very good question. The answer is that people want it all – to have their cake and eat it too, now and forever.

The fundamental problem is that no one really wants a stable economy – stable means unchanging and everyone wants things to keep getting better, and keep getting better faster without ever getting worse.

Compounding the issue is that most people are only concerned with their own part of the economy, not the total economy. So the very idea of “the economy” is a very slippery one – changing from person to person and even from situation to situation for individuals.

Then there is the issue of time scale. What’s “good” in the short term may have “bad” long term implications and vice versa.

In the short run, high consumer spending is considered good because it stimulates the economy: there are more jobs, incomes and profits rise, etc. But it is like binge – it is only sustainable for a relatively brief period. Since the binge feels so good, though, people want it to continue forever, so politicians promise it and then take steps to promote the binge. After all, they are concerned with the next election, not the long term health of the society.

In the long run, of course, the only sustainable model is growth that is equal to the increase in productivity – the more a society can produce, the more it can consume.

So high savings rates, by increasing investment, contribute to longer term growth by increasing productivity over the longer term. (But, given diminishing returns, only up to a point. There is a point beyond which higher savings rates do not help.)

Clearly, in the big picture, a reasonably (i.e. not too) high savings rate is better than high consumer spending at the expense of savings.

Know better? Leave your own answer in the comments!