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.
- 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.
- The relationship between thrift and economic growth is complicated. High rates of saving do not guarantee rapid economic growth (think of Germany)
- 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.