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Source link: http://archive.mises.org/3591/economist-do-savings-matter/

Economist: Do Savings Matter?

May 14, 2005 by

In a previous blog, I discussed a spate of articles dismissing the issue of no savings as not worthy of concern. Here I discuss Fed Governor Ben “Helicopter” Bernanke’s thesis of excessive savings. (See also Stefan Karlsson’s entry). This time, in spite of their name, The Economist magazine spouts an even greater compendium of economic fallacies than the New York Times on the topic.

They correctly note that people are saving less and then ask, “but does it matter”?In an argument remniscent the popular rationale that “foreigners lending Americans money we could never possibly repay is a sign of the attractiveness of our capital markets”, they write:

    Others argue that declining thrift is a sign of economic vigour. Thanks to high returns from shares and, more recently, from house prices, people can achieve their financial goals with less discretionary saving.
The error here is that asset returns represent only a change in valuation of capital goods or housing created with past savings. No new production possibilities come about for society as a whole, only those who own the assets become wealthier relative to those who do not. In any case, the trend toward higher asset prices almost everywhere likely represent financial asset price inflation, a damaging consequence of credit expansion.
Read on:
    From a macroeconomic perspective the right measure is the national saving rate: the sum of private saving (which is household saving and corporate saving, or companies’ retained profits) and public saving (ie, a budget surplus) or dis-saving (a budget deficit). It does not matter who in an economy is doing the saving. What matters is how much in aggregate is being set aside to finance the investment that supports economic growth.
All government spending is consumption. While it is true that every dollar the goverment spends is not saved. If the government spends less, then the private sector could save more, but that is not assured. Far more serious is the assertion that private and public savings are equivalent. Mises, in his famous critique of economic calculation under socialism, showed that central planners cannot invest — that is, turn savings into productive capital goods — because they lack a price system. Only the private sector can invest because they operate within a decentralized price system.
    The relationship between thrift and economic growth is complicated. High rates of saving do not guarantee rapid economic growth (think of Germany)
But not that complicated. Only savings can fund economic growth. It is true that highly regulated welfare states can waste and tax away a lot of savings. But no economic growth at all can be achieved without savings.
    Nor, as global capital markets integrate, must investment be funded by domestic saving alone. Countries can borrow cheaply from abroad and run current-account deficits. Most low-saving Anglo-Saxon economies do just that: America’s current-account deficit has reached a gaping 6.3% of GDP.
While it is true that savers in one country can fund investors in another country, that is most definitely not what is happening in the Anglo world. Instead, what we are seeing is savers in Asia funding consumers in the US, UK, and Australia. Savings are being consumed, not invested.

{ 13 comments }

Phil May 15, 2005 at 1:09 am

Economics may be the dismal science, but a good marginal propensity to save is a fundamental cornerstone of a stable economy. Anything else is just dismal.

Jay S. May 15, 2005 at 8:03 am

Good article. Let me ask you about the following:
I don’t save because I lived through the period of Great Inflation 1965-1980. When I put money in the bank, It was gone in no time by a combination of inflation and taxes. My parents lived through the Great Depression and saved everything. As long as we are convinced inflation is good (I don’t like inflation), saving won’t happen. The question is “is that true”? Also we are told that deflation is bad because it hurts the borrower and helps the lender, in the saving case I am the lender.

The second point is about the Japanese and Asian tigers, I have spent my career competing against them and have a working relationship with them. Their national goal (and fear) is exports and the need to use every weapon in the quiver to keep the dollar high and the yen low and imports out. They are slowly failing because the yen over the decades has fallen from 220 to 105. The way they currently keep the dollar high is by buying up the dollars we sell to buy imports and put them back in US. Question at what point does that collapse and why? Can they do that indefinitely?

Thanks Jay S.

Robert Blumen May 15, 2005 at 9:43 am

It is true that inflation is good for debtors, bad for creditors. The statement that deflation is bad for debtors, good for creditors needs to be qualified because there are a lot of things called “deflation” not all of them the same. Productivity growth leading to lower prices over time is called “deflation” by some but is not necessarily bad for creditors. A collapse of the credit pyramid, which would be a deflation in that it would destroy a lot of credit-money, would be bad for both, but if bankruptcy law were enforced then creditors would end up owning a lot of assets.

On the unsustainability of the dollar-pegging system, see Richard Duncan’s book “The Dollar Crisis”, and Nouriel Roubini’s web site: http://blog.mises.org/blog/archives/003198.asp.

Anonymous Coward May 15, 2005 at 12:35 pm

The “critique of economic calculation under socialism” link (http://blog.mises.org/blog/archives/mises.org/econcalc.asp) is broken.

Brandon Berg May 15, 2005 at 12:47 pm

All government spending is consumption. While it is true that every dollar the goverment spends is not saved…Mises, in his famous critique of economic calculation under socialism, showed that central planners cannot invest — that is, turn savings into productive capital goods — because they lack a price system. Only the private sector can invest because they operate within a decentralized price system.

I disagree with a number of points in that paragraph. First, Mises did not show that it’s impossible to invest without a price system. What he showed was that it is impossible to determine reliably the best use of capital without a price system. Even without a price system, a central planner can distinguish between consumption and capital goods.

And what does this have to do with governments in capitalist economies, anyway? As Mises himself pointed out, as long as a private sector exists somewhere, central planners can benefit from the pricing information it provides. The calculation problem is not an insurmountable barrier to investment by the US government.

Finally, it seems obvious to me that all government spending is not consumption. Maybe governments don’t invest as efficiently as private actors, but education–to the extent that it doesn’t train people to engage in counterproductive activism–certainly does more to foster growth than pure consumption spending does. The same is true with scientific research, highways, and hydroelectric dams, for example.

By the way, public saving–to the extent that there is any–is an important part of the equation. If government takes in money via taxation and uses it, say, to pay down debt, then that money isn’t being consumed–it’s just being redistributed within the private sector.

Curt Howland May 15, 2005 at 2:13 pm

I subscribed to one “Economist” weekly list, but it was so filled with collectivist dogma and I couldn’t stand it. I tried to unsubscribe, but they didn’t recognize my request, so I had to just filter it.

Stefan Karlsson May 15, 2005 at 2:48 pm

Actually, what The Economist meant in the paragraph about public saving or dis-saving was merely that government surpluses and deficits at least in a formal accounting sense (And to a lesser extent in a very real sense) adds and subtracts respectively from private saving. In today’s America for example the private savings rate is 17% but with the 4% government deficit, total savings is 13%.

Not really a controvercial theory except in the case of some pro-Bush economists at NRO. who absurdly claims that budget deficits is a addition to savings (which have a limited validity in the sense of private financial savings, but is the opposite to the truth when it comes to total savings).

Regarding the issue of whether the capital inflow to America, Britain and Australia has led to higher consumption or investment we can see that even with the strong recovery during the recent year business investment in America relative to GDP is still below the historical average. Residential investment however is at a record high and so is private consumption.

Craig May 15, 2005 at 4:28 pm

Do Savings Matter? is a question similar to the dot com mania when the question was: Do Profits Matter?

It’s a mistaken notion by the way that current inflation necessarily favors the debtor. If inflation and interest payments climb faster than income, even if it affects only a minority of the population, we have a problem.

The reality is that the Bush Administration is utterly without imagination. It’s ‘solution’ to America’s malaise is to turn a large segment of the American population into a Third World labor force.

JimmyDon Cohen May 16, 2005 at 11:19 am

Its easy to get too theoretical or abstract when debating this concept. A better and much more simple way to understand the matter is by looking into your own life.

If you don’t have any savings, when something triggers your need for those savings, it matters a lot. Try it and see.

steve marino May 16, 2005 at 1:23 pm

Re: Brandon Berg

All government spending is consumption. You can only have savings when an organization or an individual spends less then it or he earns or produces. In the case of the government, the state doesn’t produce or earn anything, it just steals resources from one entity and gives it to another entity. It doesn’t have to save, it either steals more resources through taxes and or by printing money.

Moreover, all governments spend their entire level of funding for that given year no matter what the amount is. So its absurd to talk about the chimera of government savings, because it doesn’t exist.

mikey May 17, 2005 at 12:51 pm

Steve; I don’t quite follow. Are you saying that
because governments get their money by confiscation rather than production then all
government spending must considered consumption?
Isnt it possible to consider some government spending to be on capital goods?If I remember
correctly, capital goods are those which make further production possible.Wouldn’t things like
roads, bridges, port facilities, fit this definition?

steve marino May 17, 2005 at 2:06 pm

Mikey

Public property is a euphimism for theft. Its not accurately portraying what is going on here.

Property that was once privately owned, when seized by the state doesn’t become publicly owned at all. If that were true, then you and I as members of the public could go for a spin in the local police cruiser when we want with out fear of reprisal, or add lanes to roads, or hold a party at the school gym. If you can’t control and use the property when you wish, then how can you own it?

“Public” property is private property taken and controlled and thus owned by another group, whether its politicians or bureaucrats. Its defenders try to argue that we all own it in a mystical sense, but in reality, the rationale behind public property is just another state lie used to justify their exploitation over the citizenry.

billwald May 27, 2005 at 11:18 am

“All government spending is consumption.”

Only in the sense that all activity that produces something also consumes something.

Is it more efficient for my local govt to collect property taxes and pave the streets or for each property owner to be reponsible for the street in frot of the property? Should each property owner pave the street if he wishes and pay for it as he chooses?

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