A brief economics lesson: The truth about savings and consumption

June 8, 2014 by History in a Hurry

The Truth about Savings and Consumption

July 08, 2013 by Steve Patterson

There are four major reasons inequality is squelching our recovery. The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth.

Joseph Stiglitz, “Inequality Is Holding Back the Recovery”

We regularly hear how important consumer spending is for the economy. The story goes like this: the more consumers spend, the more money circulates in the economy, which stimulates healthy job growth and profits. If people could be encouraged to go out and spend a little more of their paychecks, we’d all be better off. Remember the infamous “stimulus checks” back in 2008? Same idea.

Keynes went as far as to say that individuals saving their money may actually be hurting the economy, as saving reduces “aggregate demand” and therefore company revenue. Declining revenue can, in turn, result in a company downsizing, which compounds the problem even further. He coined this phenomenon “the paradox of thrift.” Sounds troubling, doesn’t it?

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