Question

Would it be possible to shift the American economy away from consumer to investment spending? Would such a shift be desirable?

Answer 1

Consumer spending is spending on goods and services for current consumption. Investment spending is spending on creating future production capacities. Investment spending is financed by saving. The higher the current consumption, the lower is saving and investment spending. So, higher the consumer spending, the lower would be the investment spending.

America is a low-saving economy. The American economy can shift from consumer to investment spending when the average household saving increases. This would help the country finance more investment spending. Such a shift would require a huge change in the mindset and consumer behavior of people to save more and consume less at present.

Such a shift would reduce aggregate demand to an extent as consumer spending will fall. So, there can be short-term economic issues. However, this will help American firms build more production capacity for the future. Lower investment inhibits economic growth; however, higher investment will fuel economic growth and increase income. This will increase the well-being of people. So, increasing investment spending is desirable for the long-term.