Note: This is the latest entry in the Acton blog series, “What Christians Should Know About Economics.” For other entries in the series see this post.
The Term: Consumption Smoothing
What It Means: Consumption is the use of goods and services by households. Consumption smoothing is the balancing out of spending and saving over a period of time to maintain the highest possible standard of living (measured in consumption) over the course of one’s life.
Why It Matters: Consumption is one of the first economic concepts mentioned in the Bible. Similarly, consumption smoothing is one of the first economic concepts to play a significant role in redemptive history.
In Genesis 41 we find that the Pharaoh of Egypt has two dreams that he is unable to interpret. Joseph is brought in to explain the meaning:
Then Joseph said to Pharaoh, “The dreams of Pharaoh are one and the same. God has revealed to Pharaoh what he is about to do. The seven good cows are seven years, and the seven good heads of grain are seven years; it is one and the same dream. The seven lean, ugly cows that came up afterward are seven years, and so are the seven worthless heads of grain scorched by the east wind: They are seven years of famine.
“It is just as I said to Pharaoh: God has shown Pharaoh what he is about to do. Seven years of great abundance are coming throughout the land of Egypt, but seven years of famine will follow them. Then all the abundance in Egypt will be forgotten, and the famine will ravage the land. The abundance in the land will not be remembered, because the famine that follows it will be so severe. The reason the dream was given to Pharaoh in two forms is that the matter has been firmly decided by God, and God will do it soon.
“And now let Pharaoh look for a discerning and wise man and put him in charge of the land of Egypt. Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.”
Because of his wisdom in interpreting the dream, Pharaoh puts Joseph in charge of carrying out this national-level consumption-smoothing plan. The “life-cycle hypothesis” claims that individuals both plan their consumption and savings behavior over the long-term and intend to even out their consumption in the best possible manner over their entire lifetimes. Joseph was applying this on a larger scale in a way that affected all of the people of the land.
Our own personal economic situations situations are rarely as drastic as seven years of abundance followed by seven years of famine. But over the course of our lives we often do have — or at least expect to have — more income available for consumption than at other times of life.
Here’s an example of how the life-cycle hypothesis might apply to a young high school graduate from a middle class background:
Most likely the young person will go to college since they know that higher education can increase their lifetime earnings potential. They will receive some money from their parents, work a part-time job to pay the bills, and take out a student loan to pay for the rest.
After graduation they get a full-time job, get an apartment, start paying off their student loan, and start consuming the goods and services of the middle class lifestyle. Their income generates enough to pay for the necessities, but not everything they want (e.g., a new Playstation 4). They recognize, though, that while they may only be earning $40,000 a year today, after about a decade – and a few raises – they will be earning $60,000. To smooth their consumption, they can buy items on credit (cars, clothes, etc.) since they know they will be able to pay for them over the next several years. By the time they reach the mid-point of their life, they can pay for all of their basic consumption and still have some left over to save, that is, to defer consumption for their future retirement. So the middle years of their career serve to smooth both the consumption of their youth (through credit) and the consumption of their old age (through savings).
The result is that while they may have some rough patches along the way, the middle class worker will be able to balance out spending and saving to maintain the highest possible standard of living over the course of their life.
This pattern should affect the economic thinking of Christians in at least two ways. First, we recognize that all our economic resources (such as income) are gifts given by God for the purpose of stewardship. However, we can observe — both from the Bible and from direct experience — that the level of economic resources that God gives us tends to vary over the course of our lifetimes.
Presumably, God doesn’t want us to alternate between years of “feast” and “famine” but intends for us to steward our resources in a responsible way, as Joseph did in Egypt. In the Bible, though, the impetus is placed on saving resources for future use (Proverbs 6:6–8) rather than increasing today’s consumption (through credit – Proverbs 22:7) based on the belief that God will increase our resources in the future.
Second, as Christians we recognize that God gives us economic resources not only for our own benefit but also for the purpose of blessing others (Luke 6:38). This means that a portion of our resources were given to us to smooth the consumption of those in need (Ephesians 4:28). A prime example is the frequent admonitions in Scripture to show concern for orphans and widows. The orphan may have prospects for future consumption (as a working adult) but because of the loss of parental caretakers, they are lacking in present consumption. Similarly, the widow many have had past consumption needs met through her husband, but his death prevents her from storing up resources for future consumption. We are thus called to help smooth their consumption by focusing on present needs. However, in helping the poor, we should look not only at meeting their current consumption needs but also toward finding ways to smooth their consumption throughout their life-cycle. Only by doing this can we help them escape a lifetime of poverty.
Other Stuff You Might Want to Know:
• For most Americans, from the lower middle-class to the one-percenters, this consumption smoothing life-cycle model represents the general arc of their economic life, from first job to retirement. The same is not true, though, for the working poor. Rather than one broad, life-spanning pattern, this cycle occurs repeatedly throughout their lives. The pattern repeats anywhere from once a week to several times a year. But it repeats frequently and has a profound impact on shaping how the working poor think about income, savings, and consumption. This is key difference between the economic classes. (For more on this point, see: How to Think About Money Like the Working Poor.)
• Our view of stewardship can improve or distort our consumption smoothing decisions. For example, we may borrow too much today based on the assumption that our ideal future self will be able to cover our overspending. This can lead to a self-idolatry and cause us to forget God’s promise to provide sufficient provision for his children (Matthew 6:31-32)