Missourians Should Save Their Stimulus Checks

Amid the clamor about an uncertain economy, government officials feel pressure that they should do something to fix it all. First, we have the federal tax rebate checks, as part of a "stimulus" package intended to spur consumer spending (David Stokes handily addressed that topic last month). Now we have a sales tax holiday proposal (link via John Combest) to provide an even greater incentive to spend rather than save.

It’s true that consumer spending is a crucial part of any healthy economy, but officials have confused cause with effect. Spending doesn’t create economic growth — rather, it’s a symptom of the growth that results from saving.

That’s right, saving. When you sock money away in the bank, you’re not hoarding it. You’re investing in capital growth. Economic literature is filled with explanations of how this works, but economist Mark Skousen summed it up nicely in a 2004 article about spending vs. saving:

Studies in business cycles and marketing demonstrate repeatedly that CEOs, entrepreneurs, capitalists and other business decision-makers are the primary activators of the economy, and determine when to start investing in capital again and turn the economy around. Government leaders cannot depend on consumers to lead the recovery. They tend to be passive, responding to rather than creating new products and services.

In normal times, increased savings expands the pool of capital investment, lowers interest rates, and allows firms to adopt new production processes, new technologies, and create new jobs. Thus, saving is just as much a form of spending as consumption, only a different form of spending, and in some cases, a better form of spending when it fulfills a need for more capital and investment.

So when you get that stimulus check in a few months, don’t let the tax holiday tempt you to rush out and buy something you don’t really need. Save it for a rainy day, and help lay the foundation for a real, lasting economic recovery.