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Let's say our government runs an advertising campaign, encouraging its citizens to reduce spending money on consumer items, and instead save more money.

Let's say the campaign is successful, and that happens.

How does this affect economic activity?

On one hand the factory and shop owners appear to produce less, and thus hire less people, but on the otherhand, there is more money available to build new factories etc.

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The question is too broad. But, more importantly, it is not at all an expert-level question, to the degree that intermediate undergraduate courses in Economics should discuss this topic. Hence I voted close under the off topic reason. –  FooBar Nov 19 '14 at 17:11
And who said that in this site only expert-level questions are on-topic? –  Alecos Papadopoulos Nov 19 '14 at 17:38
The invitation to the private beta, which we all got via mail, said that this is going to be the case at least for the private phase. –  FooBar Nov 22 '14 at 0:49

2 Answers 2

I understand the close-vote, because the question seems too broad, but it is a legitimate concern.

To provide some stimulus for thought:

Such a "planned" and sought-after re-allocation of given income from consumption to saving, is justified only if the savings in an economy are sub-optimal (or we think so), in the sense of hurting the investment rate, which in turns hurts the (human and physical) capital infrastructure.

Think about the extremes: consume all that you produce, save nothing (as a society). Your capital base will erode, leaving in the end only the other factor of production, labor, an orphan, without the necessary capital to produce, leaving perhaps only land for the society to return to a non-industrial agricultural state.

So it is a matter of intertemporal (re)allocation of resources in order to guarantee that the economy survives, and then that it does a bit better than just surviving.

The conundrum: if businesses see consumption declining, why would they rush to make new investments even though now the "price" of these investments is lower, due to increased savings and so to increased availability of funds?

I would invoke here "Say's Law": Supply finds its own demand. (see the controversies over it). For me, this law is better interpreted in the context of heterogeneity: no matter what overall consumer spending does, there is always some fields where consumer desire goes unfulfilled. Entrepreneurs try to identify these fields, and invest there (this has a Schumpeterian flavor).

The above discussion does not mean that we will not observe phenomena like increased unemployment. After all, investing in new fields requires re-allocation of productive resources, and this is not easily nor quickly done. And there is always the case that the "savings drive" may overshoot, and the economy will be led to a lengthy recession, Japan some 20 years ago being the classic modern example (in fact in Japan, the government tried actively to persuade the citizens to raise their consumption, but it failed).

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Prevention of AIDS is also a "legitimate concern", which doesn't make it more appropriate here. –  FooBar Nov 19 '14 at 17:10
@FooBar So is the burn out of the sun. And a million other things. So this is not a very useful comment. –  Alecos Papadopoulos Nov 19 '14 at 17:38

The whole point of saving is that you consume less NOW in order to consume more LATER. That is certainly true at a personal level.

Moreover, that is true at a national level. More savings this year means less consumption this year. The danger of savings is that if the money goes under the proverbial "mattress," instead of being invested, less consumption this year will mean less GDP this year, and will not be compensated by more consumption in future years. If the savings are invested, total future consumption will rise by whatever the rate of return is on the investments.

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