Editors’ note: 

For church leaders to be more effective in seeking the “welfare of the city” (Jer. 29:7), we should know what economic concepts mean, how they should be applied, and how they affect the church. The purpose of the Economics for Church Leaders series is not to present a theology of economics, but rather to provide a basic level of understanding that will help church leaders think more clearly about how to apply their faith commitments to economics and public policy.

The Term

Consumption Smoothing

What It Means

Consumption is the use of goods and services by households. Consumption smoothing is a balancing of spending and saving over a period of time to maintain the highest possible standard of living (measured in consumption) in the course of one’s life.

Why It Matters

Consumption is one of the first economic concepts mentioned in the Bible (see “Scripture’s First Economic Concept“). 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 Joseph’s wisdom in interpreting the dream, Pharaoh placed him in charge of carrying out this national consumption-smoothing plan. The “life-cycle hypothesis” claims that individuals plan their consumption and savings behavior for the long term and intend to even out their consumption in the best possible manner during their lifetimes. Joseph was applying this on a larger scale in a way that affected all the people of the land.

Our personal economic situations are rarely as drastic as seven years of abundance followed by seven years of famine. But in the course of our lives we often 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 because higher education can increase his lifetime earnings potential. He will receive some money from his parents, work a part-time job to pay the bills, and take out a student loan to pay for the rest.

After graduation he finds a full-time job, rents an apartment, starts paying off his student loan, and starts consuming the goods and services of the middle class. His income generates enough to pay for necessities, but not everything he wants (e.g., a PlayStation 5). He recognizes, though, that while he may only earn $40,000 a year today, after about a decade—and a few raises—he will earn $60,000. To smooth his consumption, he can buy items on credit (cars, clothes, etc.) since he will be able to pay for them during the next several years.

By the time he reaches the midpoint of life, he can pay for all his basic consumption and still have some left over to save, that is, to defer consumption for his future retirement. The middle years of his career thus serve to smooth both the consumption of his youth (through credit) and the consumption of his old age (through savings).

The result is that while he may have some rough patches along the way, the middle-class worker will balance spending and saving to maintain the highest possible standard of living in the course of his 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 God gives us tends to vary in the course of our lifetime.

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 (Prov. 6:6–8) rather than increasing today’s consumption through credit (Prov. 22:7) based on the belief that God will increase our resources in the future.

Our perspective on stewardship can also 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 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 (Matt. 6:31–32).

As Christians we recognize that God gives us economic resources not only for our benefit but also for the purpose of blessing others (Luke 6:38). This means a portion of our resources was given to us to smooth the consumption of those in need (Eph. 4:28). A prime example is the frequent admonition 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, lacks in present consumption.

Similarly, the widow many have had past consumption needs met through her husband, but his death prevents her from storing resources for future consumption. We are thus called to help smooth their consumption by focusing on present needs. 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.

For most Americans, from the lower-middle class to one percenters, this consumption-smoothing life cycle model represents the general arc of 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 effect on shaping how the working poor think about income, savings, and consumption. This is the key difference between the economic classes and one of the most important concepts for understanding the lives of poor Americans. We’ll examine this in more detail in the next article in this series, “Why Being Poor Is Too Expensive.”