The small headline on the 4:30 PM Tuesday edition of the WSJ on my iPad said, “Rising Income is Saved, Not Spent.” I know this will sound like a quibble, but bear with me. It is a quibble, but the headline encourages a popular misconception with possible adverse policy implications.
The thing is that the national income accounts and logic assure that total spending equal total income. I know that sounds Keynesian, but sometimes Keynesianism is a simply a matter of arithmetic. (The reverse is not necessarily the case.) Consumer spending need not (and should not in a healthy economy) equal total income. Ideally, robust consumer saving (disposable income minus consumption spending) would exist and be used to finance domestic investment spending. The subtraction from total spending caused by consumer saving would be made up by additional domestic investment, and the better mix of consumption and investment spending would generate more economic growth.
Only the headline writer got it wrong; the author of the article said, correctly, that “Incomes ticked up in December, but consumers chose to save instead of spend . . .” He went on to say that the personal saving rate went up from 3.5 percent in November to 4 percent in December. In other words, he didn’t say rising income wasn’t spent; it just wasn’t spent by consumers.
Now, about the quibble factor: While peddling on a stationary bike at the gym today, I saw (not heard) an advocate of food stamps arguing that each dollar the government spent on food stamps would generate, as I recall, one dollar and eighty cents worth of economic activity. He was obviously talking about the Keynesian multiplier, which in its simplest form is the reciprocal of the marginal propensity to save. The more that is saved out of each dollar (the less consumed) the smaller the multiplier and the smaller the impact of government spending. In that limited context, saving is a bad thing. It is a leakage from the circular flow of income. That is the context assumed by the headline writer.
One doesn’t have to reject Keynesian arithmetic to point out that money not spent by consumers may find its way to investors and be spent by them. A leakage (saving) from the flow of income may well finance the injection of spending (investment) by non-consumers. As long as the economic climate is conducive to investor confidence, consumer saving is a good thing, not a bad thing.
More on the quibble factor: recent debate has centered on the renewal of the payroll tax cut to stimulate (consumer) spending through higher take-home pay. Proponents argue, probably correctly, that the additional stimulus would be greater than the amount of the increased take-home pay. But you would get that stimulus plus more by cutting the employer share of the payroll tax because that would directly reduce the cost of hiring workers. Tax cuts on employees will stimulate consumer spending through the multiplier effect; so would tax cuts on employers hiring those employees plus the added incentive effects.
Of course, to analyze the economic impact of food stamps, you would also need to consider the marginal propensities to consume and save of the taxpayer (or future taxpayer) versus those of the recipients. Of course, again, there is more to a decision about food stamps that their overall economic impact. I assume that the charitable argument for food stamps would trump economic arguments. Proponents of food stamps pointing to multipliers aren’t making their best arguments.
If you tax consumer spending, you get less of it. If you tax hiring workers, you get less of it.
Headline writers should consult more closely with their authors.