Citizens may be feeling the pressure from the media or government to get out there and save the economy by spending its their patriotic duty to spend. According to the Federal Reserves Beige Book report, consumers have been pulling back on spending since September, with a resounding moan from retailers. Keeping the wallet shut is not whats causing the economy to spiral into a recession.
But the news media, such as the NY Times, would have people think otherwise about the decline in consumer spending, Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.
Whether the country is technically in a recession doesnt matter. Its whether you, the consumer, believes that it is. A recession is made up these components that all experience economic downturn simultaneously: employment, sales, income, and output. When spending has dropped, it leads to cutbacks in production, which leads to layoffs and unemployment. The drop in jobs leads to a drop in production, and the recessionary cycle continues. It would follow that you should be spending to create a disruption in the vicious cycle. In reality, the catalyst that spurs capital expansion is savings. Saving helps the economy in the long-term. Combining debt with high consumption and low savings doesnt seem like the prudent thing to do during this economic downturn, especially for the individual citizen.
The answer to the question of whether to spend or save depends on who you ask and if youre seeking a short-term or long-term solution. If youre Joe Public from a middle-income household, you want to save as much as you can to withstand the economic forces that are pushing against you. In the long-term, your goal is to have future investment. You hope to set aside more of your earnings for investments in new assets for your future needs (.e.g. college, retirement, or house). When Joe Public saves money, his funds don't disappear. Instead, the funds are allocated to borrowers through financial intermediaries. As a result, borrowers will have more capital stock and produce more goods in the future. In the short-term, your spending may protect jobs, and more jobs means more spending, which leads to more company profits, and larger output or production. At least, thats the theory.
If youre the government, youre inclined to spend money, lots of it as in big bailouts, or by creating stimulus packages and lowering interest rates to promote investments. As a response to the 2001 recession, the Economic Growth and Tax Relief Reconciliation Act distributed tax rebates between $300 and $600 to two thirds of the U.S. households.
David S. Johnson and Soueles of the Bureau of Labor Statistics and Princeton economist, Jonathan A. Parker, discovered, through the Bureaus regular Consumer Expenditure Survey, that the average household spent between 20% to 40% of its rebate on non-durable goods. However, low-income households spent 63% more on non-durable goods, such as food and health-related items. According to these experts, Our findings imply that the rebates provided a substantial stimulus to the national economy, helping to end the recession of 2001.
So how do we deal with these opposing forces and do whats good for both the consumer and the economy? The only thing you can control is your spending and doing well within your job. Allow the market to adjust itself thats how free market works. A balance between saving money and spending money is what creates a healthy economy.
People who have been saving are now in a position to capitalize on bargains. Any kind of spending should be made on assets that you really need. During a recession, you should apply cash-flow planning. This means you track the money coming in and the money going out. If you spend less than you earn, this excess income should go toward saving and investment.
