The Illusion of Saving

A substantial increase in the personal saving rate was announced last Friday to much fanfare. I hate to be a killjoy, but it was all an illusion.

The national saving rate is composed of the personal saving rate, the business saving rate, and the government saving rate. The personal saving rate is disposable income minus consumption; government saving is equal to its budget surplus. A budget deficit represents negative saving by the government.

What happened in May was that the government increased its budget deficit (increased negative saving), borrowed the money, and paid it to individuals as part of the stimulus package. Since individuals saved less than 100 percent of their higher income, they added less to saving than the government subtracted from it.

Assuming no offsetting increase in business saving, the national saving rate declined in May. Chances are, however, that business saving declined as well. If so, the decline in national saving was even greater.

A decline in national saving will necessarily be matched by a decline in national investment if it isn't made up by more saving imported from abroad. We import foreign saving by running a larger current account deficit, which requires an equally larger capital inflow to finance it. For many years now, we've had to supplement domestic saving with foreign saving to finance domestic investment. This runs up our total debt owned by foreigners and increases the burden of servicing that debt in the future.

I'm sorry, but borrowing the money to save doesn't work.

Comments (12)

Trackback URL | Comments RSS Feed

  1. John Booke says:

    Bob
    Over the first 5 months of this year there has been a huge spike in new Social Security retirees. There are alot of reasons for the spike: 1)massive increase in people turning 62 years old this year (the enormous leading edge of the “Baby Boomers”)Big increase in unemployment rate (older workers cannot find jobs 3) big jump in Social Security Cost of Living Adjustment (COLA) 5.8% 4) big drop in home prices and 5) big drop in stock market. These new retirees are saving their income, not spending it.

  2. Cannon says:

    I wonder if government will pick up the slack (in a significant way) left by private lenders tightening their lending. Personally, I’m not big on these stimulus gimmicks, because my guess is that they distort the reality of the situation, thereby delaying or possibly thwarting market forces.

    Of course, all the Keynesian economists that have emerged from the woodwork have made it quite clear that the stimulus is ‘necessary.’ I guess even if much of it isn’t spent immediately. Frankly, I understand the Fed’s current stance and the measures they have taken. I just don’t think that temporary distributions of capital, filtered through inefficient government bureaucracy, will do much good – increased personal savings or no.

  3. [...] McTeer, former Dallas Fed President, has this to say about the increase in savings reported in the last income and spending reports: What happened in May [...]

  4. JustOne says:

    It’s hard to save sunlight … but there is a lot of it and every day more arrives (so far at least). It’s sort of like the manna provided miraculously in the Old Testament. Solar energy is the feedstock for our biosphere. A little of that is “savings” that will last until it dissipates.

    The government does not make sunlight or harvest sunlight or save sunlight. It can only have sunlight that is harvested by someone else. It confiscates and “redistributes” with some level of inefficiency.

    It can confiscate from those that plant and harvest and give to those that don’t as long as some continue to plant and harvest. When producers decide it is not worth it to work while others benefit, the government will have nothing to redistribute.

    That is the fallacy of big government. Big government does nothing but take from producers what producers are willing and able to give. At some point, why bother if ones labor and effort will just be confiscated anyway. (I guess that is why I have always liked the movie Dr. Zhivago. It makes this fallacy clear.)

    When the government trys to “control” health care costs or transportation or crop production, more effort is diverted from production to control and there is, therefore, less produced to control. If it wants to reduce the cost of health care, the government needs to incentives more production of health care and remove impediments. The marketplace will adjust the cost of an abundant supply.

  5. Kevin says:

    I could not agree with you more! An additional fallacy in the savings myth is that it is good for and will contribute to the turnaround of the economy.

    At this point, almost everyone is saving money and deferring spending because of the uncertainty that exists with regards to employment, housing values and the equity markets.

    The economy cannot make a meaningful turn until the consumer is comfortable in their own long-term well being.

  6. anon says:

    I disagree. The personal saving rate certainly increased. That’s not an illusion at all; it’s a fact based on the definition of the personal saving rate. The government is accommodating the demand for increased personal saving through additional spending and cutting taxes, supplying bonds as the savings vehicle. Saving and dissaving can be redistributed across different sectors without necessarily relating to investment. Redistribution of saving between government and households is the story here. One question of course is what effect this will have on future tax rates. If future taxes increase, then future personal saving rates will decline, other things equal.

  7. anon says:

    Investment is not a necessary condition for sector saving. If someone was pretending that household saving was the same as national saving, or that an increase in household saving meant an increase in investment – that would be an illusion. But nobody’s claiming that.

  8. [...] and Growth Website 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 [...]

  9. [...] explanation is consistent with what I’ve suggested before–that more net capital inflows (and thus larger trade deficits) may be necessary to make up [...]

  10. Savings says:

    Great post and great blog. Do you write using wordpress, if not what platform do you use to blog on?