Question

A key economic adviser to President George W. Bush once said he believed that national saving was too low in the United States. But he agreed that encouraging consumers to save at a time when their spending was largely responsible for keeping the U.S. economic recovery on track could be risky. But in the longer term, he said, the rationale for increasing savings in the U.S. was clear. a. Explain the logic that lies behind the statement that encouraging saving could be risky. b. What is the rationale behind why increasing saving is good in the longer term?

President Obama wants short-term personal consumption and long-term personal savings, he said. There are contradictions everywhere. Why would Obama want short-term consumption? Why would he want long-term saving?

Answer 1

As the US economic recovery is on track, so encouraging personal consumption is very much required. Expenditure on personal consumption allows the monetary resources to mobilize and thus would be helpful in raising the GDP and the employment rate of the country. Encouraging savings in the short term would be risky as it would hamper the personal consumption of the people as their income is directed towards saving and not consumption, so the demand in the market would be low. This would in turn reduce the GDP and the employment level in the market as the manufacturing is low. Thus in the short term consumption is preferred in order to recover the economy.

At the same time in the long run, the savings and investment would be directed towards the development of physical capital, human capital, natural resources and technology. These would build up as an asset and improves the standard of living of the people in the US economy. Thus in the long run, by encouraging the savings, the economy would develop as it would lead to the development of physical capital, human capital, natural resources and technology and the overall growth of the economy.