Continuing the series (completely unplanned), consumer confidence "leaps" 32% in the wake of the successful Battle for Iraq. Consumer confidence is a really interesting metric that economists use to represent how positive the average person feels about the economy. Why does it matter how people feel? Because people who feel good about their economic future will tend to spend more money that people who are apprehensive or fearful, and consumer spending accounts for more than two thirds of the United States Gross Domestic Product. People who expect to remain employed or are confident of finding a job soon spend money. People who get a raise or expect to get one soon spend money. People who own property or stocks or bonds that are increasing in value spend money. People who own businesses that turn a profit spend money. And the more money people spend the healthier our economy is.
Why does spending help the economy? Here's a primitive example based on bartering. Say that I can craft an excellent knife, but I can't make a wheel to save my life. Likewise, you make top-notch wheels but your knives suck. I can sit around all day making knives, but they aren't worth that much to me because I can make them any time I want, and I've got a bunch of them already. Same with you and your wheels. However, when I give you one of my knives in exchange for one of your wheels we both get richer. The wheel you give to me is worth more to me than the knife I give to you, and vice versa, so both of us gain in wealth. It's very profound when you think about it.
My explanation is somewhat simplistic, but that's the basic idea behind capitalism. Trade is good, and trade increases wealth even if it doesn't increase production because it optimizes ownership and transfers products to those who value them the most. Growning consumer confidence indicates that people are more hopeful for the future and will be willing to trade their money/products to other people because they are sure there's more on the way.
Trade is good. It is mutually beneficially to all involved, and that is good for the economy.
However, "spending" is not the only kind of trade. You can trade capital. That is what happens when you put money in the bank. You trade your capital today for a promise to be repaid more capital in the future.
When "spending" is low, people are "saving". This reduces interest rates (without increasing the money supply, unlike Fed monetary policy). This in turn leads to greater investment in the production of capital, so that we can all be richer in the future.
Unfortunately, when saving suddenly increases, it leads to a disturbance in the allocation of economic resources, including labor, which means that people lose jobs. That's life. Sometimes, your skills are highly valued. Sometimes, you have to find new skills. Life is not fair. But these disturbances can be minimized by avoiding the boom-bust cycle. How? By not creating the boom in the first place.
One of the great fallacies or the age is that spending helps the economy. Women actually believe that they are improving the world by shopping. Absurd!
I think the boom/bust cycle is beneficial. When jobs are lost, productivity increases, and if we're lucky the same jobs don't ever come back and new jobs are created. That's why I like our current so-called jobless recovery.