Is spending good for the economy?

ysabel

/ˈɪzəˌbɛl/ pink 5
#1
That's the main rationale for the stimulus package, isn't it? To boost consumer spending. Maybe even create jobs.

In times of personal financial crisis, I suppose spending just makes your problems worse...but still, is that good for the economy?

What about if you're wealthy? You go on a frivolous spending binge. After all, you can afford it. Does this help the economy? If yes, then why do some people think it's a bad idea for the rich to spend so much money especially when economy is bad for everyone? Isn't it the best time to have this spending behavior?
 

ILOVEUSA911

Registered Member
#2
That's the main rationale for the stimulus package, isn't it? To boost consumer spending. Maybe even create jobs.

In times of personal financial crisis, I suppose spending just makes your problems worse...but still, is that good for the economy?

What about if you're wealthy? You go on a frivolous spending binge. After all, you can afford it. Does this help the economy? If yes, then why do some people think it's a bad idea for the rich to spend so much money especially when economy is bad for everyone? Isn't it the best time to have this spending behavior?
Spending is definitely good for the economy. Unfortunately, unless you are rich, with the economy such as it is and the rate of unemployment so high, blue collar workers are for the most part making it from paycheck to paycheck. So spending on anything that isn't a necessity is difficult.

Yes, it does trickle down when the rich go on spending binges. However, with the losses in the market, the banking debacle, coupled with the fact that President Obama has imposed higher taxes on the rich, they may even be tightening their belts, because the future is so uncertain. Rich people usually have a lot of their money tied up in investments. So they could be having a "wait and see what happens" attitude before any type of spending binges.

If I could get some stimulus money, I promise I would spend, spend, spend. I love to shop!:D
 

icegoat63

Son of Liberty
V.I.P.
#3
Thats a good question and I have to laugh. The way I've always understood it and I could be wrong here so if someone is more inclined to a more accurate answer I hope this will provoke them to do so.

But when it comes to Spending the funny thing is the Government doesn't really care if you're spending it at Macy's or Barnes & Noble. What they want is you to put the money in the bank and have the Bank spend the money on the Stock Market. Because that's where the real spending happens. The money that's exchanged just between the banks alone is substantial and the cut that the government gets from it via interest rates and other means are way more than what Jane Dough could spend on a $5,000 shopping mall rampage. Agreeably money has to exchange hands on the lower level (us citizens) for the banks to even have the confidence enough to even play the stock market. But yeah, the bulk of the spending the way I understand it works in a nutshell like this via all the Econ and Accounting classes I've taken;

The People: Spend their money to build the banks confidence in certain corporations or other ventures with stock availability. They are also the ones that invest their money in the banks.

The Banks: Take the peoples invested money and use it on the stock market in Federally Protected method to make More money with our money. This in turn sparks the economy to move faster when confidence is at its highest.

The Government: Gets its cut via loans to the banks so that they have the money to loan to the people that the people pay back to the bank that the bank either pays back to the Gov't or puts into the stock rotation.

Now having taken all that into consideration, I still have no friggin clue which one needs to lead the other :hah:
 

Mirage

Administrator
Staff member
V.I.P.
#4
I don't see how it can be good.

Is spending good for a family in debt? Is spending good for a business that is going under? No....... Cutting back and making wise financial decisions according to a budget is best.

So why would it be any different with a government?

Um... we do have to pay this back, so we'll spend a few trillion now and guess what? Yep, we still have to pay it back....

This is the exact same type of thinking that got us into this mess.

Take the housing crisis for example. Is it really a crisis or an epidemic? A crisis would imply an unstable condition. An epidemic is the rapid spread of something. I'd say the mentality of "spend more than you can afford" is spreading like an epidemic. It's why so many people bought houses they can no longer pay for and it's why our own government is taking out loans when it can't even pay for trillions of dollars in previous loans.
 
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Iris

rainbow 11!
#5
Not everyone is in debt, Hybrix. Also, he is spending money so that in the long run it will help the economy. Whenever I go shopping (even if it is something I need) I joke that I am going to go stimulate the economy lol
 

Mirage

Administrator
Staff member
V.I.P.
#6
Not everyone is in debt, Hybrix. Also, he is spending money so that in the long run it will help the economy. Whenever I go shopping (even if it is something I need) I joke that I am going to go stimulate the economy lol
Well you actually would be stimulating the economy. :lol:

As for not everyone being in debt. I'm talking about the USA being in debt. It's pretty astronomical.
 

ysabel

/ˈɪzəˌbɛl/ pink 5
#7
I forgot about this thread until Hybrix brought up the good side of the countess getting thousands in weekly pension for her lifestyle. She's going to spend the money to stimulate economy! :)

But when it comes to Spending the funny thing is the Government doesn't really care if you're spending it at Macy's or Barnes & Noble. What they want is you to put the money in the bank and have the Bank spend the money on the Stock Market. Because that's where the real spending happens.
I read something about how saving might be more helpful than spending in terms of moving the economy. That is if you put it in the banks. But then another article caught my attention. Here's an excerpt:


Stop Saving Now!
Daniel Gross

NEWSWEEK, issue dated Mar 23, 2009

The hum of ambient noise in midtown Manhattan is several decibels lower than it was a year ago. Fewer black Town Cars idle outside the investment-bank offices on Park Avenue. The aisles of the flagship Saks Fifth Avenue are so quiet you'd think you were in a library. The restaurants and shops at Rockefeller Center are open as usual, but they seem oddly depopulated. Where are all the tourists and office workers, the hordes of junior analysts lining up in Starbucks?

.....

In the grip of a bubble mentality, we—as investors, consumers and businesses—blithely assumed risk and convinced ourselves it was perfectly safe to do so. We bought houses with no money down, took on huge amounts of debt and let the booming stock and housing markets perform the heavy lifting of saving. After all, new technologies, securitization and derivatives permitted financial wizards to slice, dice, sell—and, ultimately, banish—any type of risk. But the intellectual scaffolding surrounding that culture of debt and risk has fallen along with the stocks of Citigroup and AIG. And now the zeitgeist has spun 180 degrees. Squeeze your nickels, slash debt, stop gambling. In January, Nevada's casinos reported, gamblers lost 14.6 percent less money than they did in January 2008. "The precautionary behavior of every entity in the global economy has gone up," Mohamed El-Arian, CEO of the giant bond-investment fund PIMCO, told NEWSWEEK. "We've gone from an age of entitlement to an age of thrift."

Call it a flight to safety, a rush from risk, the new sobriety. "People have run with their money to banks that they think are still healthy," said Ronald Hermance, CEO of Hudson City Bancorp, where deposits have soared by nearly one third since the beginning of 2008. In January, Americans saved 5 percent of disposable personal income, up from 0.4 percent in the fourth quarter of 2007—and our newfound desire to squirrel away cash seems likely to continue. When pollster Scott Rasmussen asked investors what they'd do with new money in February, 32 percent said they'd save it, and only 16 percent said they'd invest in stocks. Even though they offer virtually no returns, money-market mutual funds, now guaranteed by the federal government, have attracted $3.8 trillion, up from $3.4 trillion a year ago. The global rush for U.S. government bonds, the world's safest and most liquid investments, has pushed rates so far down—the 10-year bond yields just 2.9 percent— that investor (and Washington Post Company board member) Warren Buffett has warned of a "U.S. Treasury bond bubble."

The rush to hoard cash and pinch pennies is understandable, given that some $13 trillion in net worth evaporated between mid-2007 and the end of 2008. But while it makes complete microeconomic sense for families and individual businesses, the spending freeze and collective shunning of nonguaranteed investments is macroeconomically troubling. Especially if it persists once the credit crisis passes.

For our $14 trillion economy to recover and thrive, hoarders must open their wallets and become consumers, and businesses must once again be willing to roll the dice. Nobody is advocating a return to the debt-fueled days of 4,000-square-foot second homes, $1,000 handbags and $6 specialty coffees. But in our economy, in which 70 percent of activity is derived from consumers, we do need our neighbors to spend. Otherwise we fall into what economist John Maynard Keynes called the "paradox of thrift." If everyone saves during a slack period, economic activity will decrease, thus making everyone poorer. We also need to start investing again—not necessarily in the stock of Citigroup or in condos in Miami. But rather to build skills, to create the new companies that are so vital to growth, and to fund the discovery and development of new technologies.

(....)

Economists warn that if we don't manage to jolt the economy back to life soon, we run the risk of repeating Japan's "lost decade" of the 1990s. Would that be so bad? After all, while Japan endured a prolonged period of slow growth, nobody starved, there was no social unrest in the aging country, and its biggest companies continued to innovate. But America is different. Thanks to our continually rising population, we need significant growth just to maintain our standards of living—and the health of our democracy. "When people experience progress in their material living standards and they have some degree of optimism that it will continue, they're inclined to support public policies that reflect tolerance, opening of opportunity and commitments to democracy," says Benjamin Friedman, a Harvard economist and author of "The Moral Consequences of Growth." A second moral imperative demands that America get back on the growth track. The U.S. remains the single largest source of demand. Until America emerges from its bunker, the global economy—facing its first year of contraction since World War II—is likely to remain moribund.

Saving cash and building up reserves is a necessary first step to recovery. But eventually the mountain of cash has to be put to work. Last week's sharp market rally was certainly a sign—however fleeting it may turn out to be—that investors are putting money to work again. Retail sales in February provided another hint that purse strings may be loosening. But there's much more work to be done. Ironically, post-bubble periods are frequently great times to start new ventures. The best time to start a dotcom wasn't in 1999 when the IPO market was raging, it was in 2002, when the price of everything associated with the business—office space, programming talent—had plummeted. When Allied Corp. in the late 1980s didn't want to pursue the development of consumer products based on global-positioning-satellite technology, Gary Burrell left, raised $4 million and formed Garmin, which today employs about 7,000 people.

But investing during slack times requires a leap of faith. Thomas Watson, CEO of IBM, ramped up R&D spending every year from 1931 to 1935. "His board of directors thought he was nuts," said Harvard Business School historian Nancy Koehn. But when the Social Security system was rolled out later in the decade, only IBM could handle the data-processing requirements. Both Southwest Airlines and Federal Express were founded in 1971 and took flight in a period of stagnant growth and soaring energy costs. NEWSWEEK was founded in 1933, one of the worst years on record for print advertising.

Full article here.
Might this be the objective of the call to spend?
 

Mirage

Administrator
Staff member
V.I.P.
#8
Here's how I see it.

Spending is good for the economy.

Spending is bad for your own personal finances.

Basically the government is asking people to NOT save, which is poor planning for the future. What happens if these people lose their job later and have no emergency money set aside?

I say let the economy fix itself. Let companies that fail.. fail, and don't give money to people simply for the sake of having them spend it. It's like picking a scab. It might seem healed for a while but it will continue to scab over until you let the healing process take place.