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What would the economy be like if everyone acted more sensibly?

dtmt

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I've been thinking about this recently...

What would the US economy be like if most people planned their finances in a sensible long-term manner?

What if no one bought huge a gas-guzzler they didn't need, and instead just kept the same reliable economy car for 10+ years? What if no one got lured into buying a house they really couldn't afford to own or maintain during the housing bubble? What if people stopped paying thousands of dollars for trendy clothing that's only wearable for a few months and instead only bought pieces to wear until they wore out? What if no one carried a balance on their credit cards?

In other words, what if people only bought what they really needed and put everything else into long-term savings?

Overall this sounds reasonable, but what would be the overall effect on the economy? I mean, so much economic growth has been based on people buying a bunch of crap they really didn't need (on credit), hasn't it? I mean, when people buy stuff, that provides jobs to workers and dividends to investors, right?

So what would happen if everyone just behaved sensibly, would economic growth stagnate? Is our economy like some junkie that will go into cardiac arrest if he doesn't keep getting some ultimately poisonous fix? Or would we all be okay somehow?
 

lee_44106

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Sounds like an episode of the Twilight Zone..
 

FrankDrebben

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I believe in trickel-down economics, the more money I have, the more I spend, the more I spend, the better off the economy is. Of course, I fully fund my retirement accounts and pay off all credit card debt every month, so I am not sure if I really answered your question. I am just saying that Obama's tax plans don't work (neither do McCain's, but that is for another comment).

I have seen it firsthand on the freeways and in the restaurants around me, once the economy slowed, the streets were lighter on traffic and the restuarants easier to get into. Again, not directly responsive, but intersting to think about.

And...to answer your question, if everyone had fully funded long-term savings, there would still be a large group out spending (the retirees and the heirs), so the trickle-down would still go-on.
 

Asch

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I just finished reading my first economics textbook and was left with exactly the same question.
 

celery

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Well, first of all, big business (most of them) would fail pretty hard.

Big business is built around marketing really crappy, poorly made things to the masses and selling tons of it.

If people were actually sensible, they would want worthwhile things for their money and I honestly believe we would see more small businesses and artisan stores.

But, that is obviously not the reality we live in, so Ed Hardy can make insanely putrid clothing and sell a T-Shirt for $200. Applebee's is considered a "nice restaurant" by many people. And so on . . .
 

dtmt

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Some supporting evidence how the economy needs reckless spending: Congress OKs $8B to offset gas tax drop Basically people stopped driving more than they really need to, which caused gas tax revenues to drop and now there isn't enough money to maintain the roads. And this means there will be an effect on any auto-related business as well -- if people drive less, they will need a new car less frequently, they won't need as much maintenance/repairs, they will be less likely to get into an accident which means that auto body shops/insurance adjusters will have less work, etc...
 

w.mj

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Short answer: if people saved more, it would cause an immediate depression followed by a gradual but sustainable growth. The ideal situation would be if people would save slightly more each year, giving firms time to make efficient long-term production decisions.

Long answer: this is sort of a chicken/egg question. Of GDP components, investment is far and away the best predictor of long-term economic success. That is to say, if 60 years ago, when the US produced ~50% of the world's output, we had all decided to save 15% of our incomes and done so since, the economy would have more underlying strength.

Unfortunately, human nature tends to value the short-run over the long-run. As people feel wealthier, they tend to shift more of their product from savings to consumption. Exactly this has happened in the United States. The savings rate has dropped so far because other countries are willing to buy US Dollars and therefore do our saving for us. If they were unwilling to purchase these dollars, inflation would eat into our spending power, people would feel poorer, and they would begin to save more. In theory, it is a self-regulating system: People feel richer -> people spend more -> inflation makes people poorer -> people save more.

The above situation is why China's (and Japan's before them) position of forced devaluation of the RNB is so malicious. It has the twin effect of hurting US industry, leading to long-term economic stagnation, as well as artificially propping up the dollar. These effects circumvent the self-regulating system of inflation and consumption. Because of this, our economy has grown so dependent on consumption that a rapid correction in the savings rate would almost certainly cause a depression.
 

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