January 5, 2014

2013 Winner of Lights, Camera, Liberty! - Foundation for Economic Education: “The Truth About Savings and Consumption”

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 paycheck, we'd all be better off.

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. Sounds troubling, doesn't it?

Fear not. You aren't actually hurting anyone by filling up your piggy bank. In fact, savings help the economy, as they make lending to productive entrepreneurs possible. The consumption that we enjoy is only made possible by prior production.

And that production is only made possible by savings.

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Foundation for Economic Education