Stunning Analysis from Time!

Stunning for its insight that is. With the exception of the all-too-common equating spending with consumption and not spending with saving, Rana Foroohar gets it just about right.

In a nice post noting the importance of saving for economic progress, Foroohar highlights several points that bear repeating. Namely that low savings are correlated with low investment and growth and can inhibit risk-taking. This is because all investment, research and development and entrepreneurial activity are all funded by savings.

As Foroohar explains:

Consumer spending today may bolster the economy in the short term, but it can actually cut into growth over the long haul if it depletes funds available for investment in the economy. Individuals’ savings, deposited in banks or poured into asset markets, gets funneled back into the economy via loans and capital purchases that allow companies to grow and expand and hopefully to hire better skilled workers, ultimately increasing GDP growth.

I would also note that, unfortunately, Foroohar still remains somewhat captivated by the modern macro view of the social economy. The last phrase in the preceding paragraph reveals a common fallacy of equating GDP with the economy. More important that increasing GDP growth is the fact that economic expansion funded by actual savings is sustainable, real prosperity, not merely a paper increase in official GDP.