Despite the poor interest rates on savings accounts, there are times when saving is smart. Saving is an important part of staying out of debt, for example. Yet many will argue that a dip in consumer spending hurts the economy. It may be a symptom of a hurting economy, but does saving your money during a recession actually make the economy worse off? According to Trent Hamm’s article in The Simple Dollar, savings accounts contribute to the health of the economy more than you might think.
Economist John Maynard Keynes believed that if everyone saved more money during times of recession, then demand for goods would fall. Economic growth would slow, businesses would fail, and people would lose their jobs. He called it the “paradox of thrift.” But Hamm says there are two major factors preventing the economy from falling apart in times like these. First, when demand falls, prices fall, so shoppers are more likely to spend money.
The second and most important factor, Hamm explains, is that “putting money in a savings account does not remove it from the economy.” In times of slow spending and increased saving, consumers are helping to drive the banking industry more than the retail industry, but they are still contributing to an important piece of the economy. Money in savings accounts also gets lent out to businesses at low interest rates, driving growth, hiring, and product innovation. Hamm claims it’s all part of how the economy cycles between growth and recession.
“By saving,” he writes, “you’re actually doing your economic duty, just as you would be if you were buying things. A healthy economy needs plenty of both.”
Hoarding money, on the other hand, is harmful to the economy, but it’s also just foolish on an individual level. Burying cash in your backyard does indeed remove it from the economy. But the other thing to remember about saving is that it is essentially just deferred spending. In the long run, as the economy recovers, consumers will eventually be able to make large purchases all because they hunkered down and saved. On the other hand, spending when you don’t yet have the money (or an adequate emergency fund) is just going to lead to debt.
The decision not to spend money, in itself, does not do the economy a disservice. It can actually be beneficial. One of the most important things about consumer spending habits is that they effect change. What we buy and don’t buy can transform business and encourage the economy to evolve. Now more than ever, consumers need to encourage products and business practices that work for everyday people and the environment, not rich and powerful corporations. The way we do that is by saving and spending wisely.
One of the best examples of this phenomenon is the healthy eating craze. Soda companies are hurting. The packaged foods industry is struggling. When these businesses see sales plummet, they respond by making changes to their products. McDonald’s is closing more restaurants than it is opening this year, which means some people will lose their jobs. But hopefully, subsidy reform permitting, the organic movement will grow to create even more jobs.
People must spend some money on food of course, since it is considered a necessity, but other industries like fashion and luxury goods might have to adapt even more when sales suffer. One can hope, at least. The silver lining of economic recession could be that it gives people pause to rethink what they are buying and selling. By putting more thought into what we sell, how it’s made, and how it actually impacts people and the environment, we can help encourage a healthier and more productive society.
After all, what’s the point of throwing money at retailers in the name of the economy, if we’ll be destroying the planet in the process?