An alternative to popular faith
Stephen Gandel is a senior writer at TIME, where he covers real estate, economics and Wall Street. He blogs at The Curious Capitalist. In one post at What’s Worse: Stingy Banks or Thrifty Consumers? he said, “Now it is true that for the long term health of the US economy we all need to save more and borrow less.”
Though this passes for popular faith in economics, I see no evidence that personal saving benefits the economy.
As you can see there is no relationship between saving and GDP growth. Worse, no one really knows what “saving” is. Here’s an excerpt from Free Money:
Decide which activities you consider “saving.” Develop your own rules about what is “saving.”
Do you “save” when you:
1. Bury your currency in a tin can in your back yard?
2. Deposit your money in your bank savings account or in your money market account?
3. Purchase Treasury bills or bank CDs?
4. Purchase guaranteed-interest, whole life insurance?
5. Purchase stocks and bonds?
6. Purchase real estate?
7. Purchase a business?
8. Purchase your primary residence?
9. Purchase a secondary residence?
10. Purchase a car for your business use?
11. Purchase a car for your personal use?
12. Purchase a television set?
13. Purchase food and clothing?
Study this list. The more you think about it, the more doubts you probably will have about what is saving, what is investing and what is spending — and what part of investing really should be considered saving.
So, between the lack of historical correlation between saving and GDP growth, and the arbitrary and varying definitions of saving, the popular faith that saving benefits the economy seems questionable.
Also, keep in mind the 2nd part of his statement, ” . . . we all need to . . . borrow less.” Since borrowing creates money, borrowing less creates less money, which certainly is not stimulative.
Rodger Malcolm Mitchell
10 thoughts on “–Does personal saving stimulate the economy?”
Excellent points, Rodger! 🙂 This is not simple.
But whatever savings means and whatever its relation to economic growth, it has an important psychological-economic aspect. Part of the psychology of poverty is present orientation, which means that poor people in general do not save, not just because they do not have much money, but because saving is future oriented. Future orientation helps people get out of poverty. In terms of individuals, saving is probably good for their economic well being.
Whether that means anything in terms of macroeconomics is another question, of course. My own inclination is that the government should generally encourage private savings by running deficits, not to increase the GDP, but to promote the economic health of the populace. But who knows?
Probably the most effective way to change the psychology of poverty is to end poverty, not to encourage future orientation. 😉
Survival has programmed us first to address the present. When your car is stuck on a railroad track, with a train bearing down on you, your first thought is not whether to lease or finance your next car.
Poor people are stuck on that track.
I have not seen the evidence that encouraging private savings promotes the economic health of the populace, which is the point I made in my post.
But then, I don’t understand the difference between saving and investing. My only redeeming factor is the knowledge that no one else does, either.
This I know: Federal deficit spending is necessary to grow the economy. Growing the economy is a good way to help poor people.
Rodger Malcolm Mitchell
I couldn’t understand some parts of this article, but I assume I only need to learn a bit more regarding this, because it definitely sounds interesting and kind of though-proviking! By the way, how did you first get started with this?
“This I know: Federal deficit spending is necessary to grow the economy. Growing the economy is a good way to help poor people.”
Well, it seems like growing the economy doesn’t seem to have done much for poor people for the past 30 years or so. Can’t say I know why. 😦
Compared to what?
Rodger Malcolm Mitchell
Well, from what I hear, despite the economic growth of the past three decades in the U. S., the rich are better off than they were, and the people in the middle are about the same or slightly better off, and the poor are worse off. No?
“Better off.” “Worse off.” I have no idea how to quantify these terms.
Don’t allow yourself to fall into the same trap as the debt hawks, who use generalized language to make their case.
If this site tries to teach anything, it’s that popular faith often is wrong. Economics is a science. Unfortunately, very unscientific principles seem to have taken over.
If saving is considered as capital not used for consumption or production increase then saving is “good” for the individual (from a psychology perspective,like having some reserves in the case of emergency etc) but not good for the economy.Thats the paradox of thrift…if we all start to increase savings..then boom!
Saving is neutral for the economy. It neither adds nor subtracts money from the economy. Think of what happens to the dollars you save.
That is why i said “If saving is considered as capital not used for consumption or production increase ” ie if it stays out of circulation.The money you save in the bank probably dont stay out of circulation since its invested through loans (and based on fractional reserve banking this money is multiplied).The paradox of thrift is more theoritical because we never take enough money out of circulation….but sometimes the government does…through running surplasses.