Increased consumer spending is good for the economy.. How can that be?
December 23rd, 2011 | 
Author: Question by Jeffers: Increased consumer spending is good for the economy.. How can that be?
Lots of commentary on the economic crisis suggests that increased consumer spending would have a knock on effect that would benefit the economy. Now I understand the basic mechanics; consumers spend, business benefits, economy benefits, the public benefits.
But at the same time, this seems a bit counter intuitive.. I mean surely if there is less money, we shouldn’t encourage more spending, especially frivolous consumerism.
I mean lets it break it down; if we live in a forest and we pick so much fruit that there is no longer enough to feed us, then surely we must cut down fruit consumption untill the forest recovers.
I suppose that if we continue to consume fruit, we encourage people to plant more trees and to increase the size of the forest. But surely if the forest is under strain, we dont ENCOURAGE people to pick more fruit.
Nevertheless, it seems that government always wants to grow the forest, without ever encouraging people to pick less fruit hence giving the forest a break.
Is there anyway that our economic system can actually encourage less spending without sabotaging itself?
Best answer:
Answer by colanth
The economy is like a balloon with a tiny hols in it. If you don’t keep a certain minimum of air flowing, it collapses. Think “spending” for “air”.
There aren’t enough of the wealthy to spend enough. Even if they all bought new clothes, new cars, etc., every year, that’s only a small breeze.
The poor don’t have enough to spend on anything but rent and food.
The middle class has to have the money to keep the economy going. Once the middle class stops spending (as happened this past summer), the balloon collapses. Then we need a quick shot of government air (money to the middle class, and a favorable view of spending) to keep it from collapsing completely (as it did in 1929).
What’s happening now is that no one want to spoend the money they have. (Homeowners just lost a MASSIVE amount of money – the equity in their homes.) Buying shares in banks – hoping, but not requiring, that the banks will use the money to stop the forclosure mess, didn’t work. So now we’re looking at *another* bail-out that – if it’s not aimed at building up the middle-class outlook for the future – is also going to be throwing money into a bottomless pit (it won’t work). Trickle-down economics – giving money to the rich in the hope that the poor and middle class will get some of the fallout – has been a proven failure every single time it’s been tried – since the beginning of capitalism. (It’s been called “the trusts”, lassez faire economics, tax breaks – it’s all the same, and it leads to crashes.)
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Your problem is that you are using a faulty analogy, the economy is how we distribute capital, spending money keeps it in the economy, hording takes it out. The current crisis is a result of too much of the nations wealth being held by too few people resulting in money not moving around. This doesn’t equate to a forest, picking and eating fruit removes the fruit, it doesn’t keep the fruit healthy and providing seeds. Spending is planting, not picking, the problem is that people have been spending beyond their means, and that’s what need to stop.