When the lockdown eases, do the economy a favour and spend, spend, spend

The lockdowns have triggered an involuntary rise in saving. There is very little that can be done about that. If the shops are closed, we cannot spend. But if we all voluntarily maintain a higher rate of saving once the shops reopen, that would be very bad news.

Over the long run, a high rate of saving can be positive for economic growth. Savings provide the loanable funds that finance investments and innovation that are crucial for sustainable expansion.

During a downturn, however, extra saving is exactly what you do not need. A cyclical recovery depends on a rise in demand. That can only come from higher spending.

This sounds like very imprudent advice, but we must try our best to spend again once it is safe to do so. Prudence demands that we should collectively resist the urge to save.

On an individual basis, saving a bit more may seem sensible. If in doubt, should we not put money by for a rainy day? Paradoxically, the answer is no in this case.

If we all try to save more at the same time, we will keep economic activity depressed and end up with precisely the opposite of what we want. Instead of having more, we will have less disposable income in the future.

Income and spending are two sides of the same coin. If we all save more and spend less during a downturn, then economic activity and our incomes from it will fall further.

That then encourages more saving. A dangerous self-reinforcing dynamic can develop.