Saving versus Savings

My recent post on The Illusion of Saving set a new record for me in visits and hits. That made me feel good. I would feel even better if hits and visits didn't come before the reading. In any case, here is some more on saving and savings.

There is a big difference between an economist's view and the educated layman's view of saving. In the years when the personal saving rate was near zero, it was common to hear the opinion that it really wasn't that low since the official measure doesn't count this or that. This or that might be equity in homes, capital gains in assets, 401K's, etc. This line of thinking confuses saving with savings.

Economists define saving, a flow, as disposable personal income minus consumption. It's the current output/income that is not consumed or used up during the relevant time period. It is a measure of the output available for investment rather than consumption.

Conveniently, investment (real investment, not financial investment) may also be defined as the output/income not used up in the current time period. So, ex post saving and investment are equal by definition. That hocus pocus is easier to accept once you realize that inventory accumulation is considered investment. If you produce it and it isn't consumed (used up) it is considered investment, even if it is consumer goods left on the shelves unsold.

While actual saving and actual investment are equal ex post, they are unlikely to be ex ante. Investors' plans to invest and savers' plans to save are usually not equal, but economic variables (incomes, interest rates, exchange rates, inventories, etc.) change to bring them into equality (again with a little help from inventories) after the fact.

I've repeated all this familiar Econ 101 stuff to highlight the point that economists view saving as making resources available for investment. Again, saving, the flow is disposable personal income minus consumption. Saving is not consuming.

Savers save by not consuming. This leaves them some savings on hand which they may invest in the financial sense in various ways. They may put it in a bank account, buy a stock or bond, or put it in the mattress. Or, they may even invest it in the real sense of building a factory. In the latter case, they would be acting as both saver and investor.

People who argue that the calculations are wrong because they don't include this or that are not talking about saving; they are talking about savings. They are talking about what is done with the savings after the saving has been done. They are talking about oranges rather than apples.

This is not a distinction without a difference. The distinction is necessary for clear thinking about how the economy works. It shows how necessary saving is for growth since it's a limitation on investment. You can't have a high ratio of investment to GDP without an equally high ration of saving to GDP– but that's national saving, not personal saving. National saving includes business and government saving as well as personal saving. That was the point of The Illusion of Saving which showed you can't increase saving by having the government borrow the money given to consumers to save.

Comments (4)

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  1. anon says:

    When national economies are open, as they are, the global economy is the only economic level at which it is true that saving equals investment.

    At any sub-global sector level, this equivalence need not hold. Sector or micro saving can finance dissaving in the form of consumption.

    E.g. the US government provides stimulus in the form of spending and sells bonds to non-government savers. No investment need be referenced in this equation.

    E.g. the US in its relationship with the rest of the world dissaves via its current account deficit and the rest of the world saves. No investment need be referenced. (Investment can be referenced by noting that current account deficits equate to investment deficits and vice versa. But this is just the flip side of the saving imbalance.)

    Another way of looking at this is to recognize that saving can be negative at the sector level but investment can’t.

    The ex post / ex ante distinction is fully reconcilable. It occurs by inventory adjustment and/or in the case of pure services by sector saving and dissaving. If I stop purchasing service X, I save from income at the margin and the vendor of the service dissaves (holding other things equal, including the vendor’s expenditure).

    Finally, a lot can be understood about saving by understanding that it does not include capital gains.

  2. Sergei says:

    But at the level of the entire economy, the US must be saving, as the current account deficit is falling, so the country is requiring less financing from abroad, no?

  3. My observation is that consumers as a collective group of people cannot have a net saving since the economic system can never pay consumers an income exceeding or equal to the value of consumption. Therefore if some consumers save part of their income others have to borrow more than what is saved. This means the economic system needs to have a system of banking that could create more credits than incoming deposists. So capitalism evolved a system of banking just to do it and is called “Fractional Reserve Banking”. Most economists ignore this fundamental truth and enter into a useless argument about saving and savings.

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