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Friday, February 06, 2009

Economics I don't understand, #3

Consumer [over]spending was a big contributor to the current economic problems. Americans added more debt; now that there are job losses this debt burden (a) makes people more subject to foreclosure and bankruptcy, and (b) magnifies the downturn in personal spending because people not only have less money, they have to try to deleverage as much as possible.

That's the oddity of the savings rate going UP right now.

But what I don't understand is this: our economy was disproportionately built on consumer spending. Long term, don't we need to have an economy that makes stuff, rather than importing stuff [from China, Saudi Arabia, Mexico, etc.]? So, if we spend most of our effort right now on increasing consumer spending to get people back to work quickly, doesn't this work against our long term needs?