Do Savers “Take Resources out of Society”?
Revisiting a previous post, “Saving” ≠ “Saving Resources”*, wherein I question Scott Sumner’s notion that people who spend and consume more (save less) take resources “out of society.”
Try this:
John works for Debbie, and Debbie works for John.
They each start out with $100 in dollar bills, $200 total.
They pay each other in dollar bills: $100 a year, each direction.
Between them, through their labor, each year they produce $200 in real resources — things that humans can consume to derive human utility (or to produce more consumables in the future).
But: This year Debbie decides to save money, so she doesn’t hire John for as many hours, and only pays him $80. She leaves $20 sitting in her drawer; she doesn’t circulate it this year.
At the end of the year Debbie has $120, and John has $80.
Debbie has produced $100 worth of real resources, and John has produced $80 worth. $180 total, instead of $200 the year before.
Did Debbie “take those $20 in real resources ‘out of society'”? (Or was it John — lazy, feckless soul that he is — who didn’t do that $20 in resource-creation?)
We can certainly say that Debbie’s decision to leave the $20 sitting in her drawer instead of circulating (spending) it caused “society” (Read: John) to produce less resources than it would have if she had circulated (spent) it.
Is Debbie a “taker”?
Cross-posted at Asymptosis.
well, if you are saying that rich people and corporations that are sitting on piles of cash because they are afraid to invest after their prior greed and criminality has made “investing” too risky…
i’d say yes.
but if you are asking if some poor worker thinks he better save some money because he might not have a job next year… i’d say no.
or if you are thinking of some old hippie like me who doesn’t spend any money at all because he doesn’t need a new, new, new car or a big, big, big house… i’d still say no.
i am fairly sure “the economy” could adjust to a nation of “savers” who only bought what they needed… thus saving real resources like air and water and even the oil that is poisoning the water and air.
of course an economy like that would probably not be able to build an army capable of defending itself against a society that built factories in order to create the “infrastructure” for war machines and rich men’s toys
so i don’t see any easy answers. but i like to try to point out that there are no easy questions either.
Would deficit spending ($20) by the government make up for the negative economic impact of Debbie saving $20?
@Jerry Critter: “Would deficit spending ($20) by the government make up for the negative economic impact of Debbie saving $20?”
Which the government, of course, can produce out of thin air, like a bowling alley produces points.
Well if guv hired John for $20 worth of work, yeah. $200 in stuff would get produced instead of $180.
Unfortunately, this still leaves us far from any simple or obvious conclusion about the long-term prosperity that might or might not result from that $20 injection. A whole lot of assumptions need to be tacked on to even start thinking about the question — more than I can begin to tackle here, or perhaps tackle at all.
Steve, Remember those 15 fatal fallacies of financial fundamentalism, by the late Bill Vickrey? #2: Urging or providing incentives for individuals to try to save more is said to stimulate investment and economic growth. This seems to derive from an assumption of an unchanged aggregate output so that what is not used for consumption will necessarily and automatically be devoted to capital formation.
Again, actually the exact reverse is true. In a money economy, for most individuals a decision to try to save more means a decision to spend less; less spending by a saver means less income and less saving for the vendors and producers, and aggregate saving is not increased, but diminished as vendors in turn reduce their purchases, national income is reduced and with it national saving. A given individual may indeed succeed in increasing his own saving, but only at the expense of reducing the income and saving of others by even more.
Where the saving consists of reduced spending on nonstorable services, such as a haircut, the effect on the vendor’s income and saving is immediate and obvious. Where a storable commodity is involved, there may be an immediate temporary investment in inventory, but this will soon disappear as the vendor cuts back on orders from his suppliers to return the inventory to a normal level, eventually leading to a cutback of production, employment, and income.
Saving does not create “loanable funds” out of thin air. There is no presumption that the additional bank balance of the saver will increase the ability of his bank to extend credit by more than the credit supplying ability of the vendor’s bank will be reduced. If anything, the vendor is more likely to be active in equities markets or to use credit enhanced by the sale to invest in his business, than a saver responding to inducements such as IRA’s, exemption or deferral of taxes on pension fund accruals, and the like, so that the net effect of the saving inducement is to reduce the overall extension of bank loans. Attempted saving, with corresponding reduction in spending, does nothing to enhance the willingness of banks and other lenders to finance adequately promising investment projects. With unemployed resources available, saving is neither a prerequisite nor a stimulus to, but a consequence of capital formation, as the income generated by capital formation provides a source of additional savings.
Well, if Debbie is saving $20 she probably has it in a bank. If this is true, the bank is lending the money. Therefore, ceterus paribus, the money is still in the economy, just not via Debbie.
Jerry
yes.
@Anthony: “Well, if Debbie is saving $20 she probably has it in a bank. If this is true, the bank is lending the money.”
That’s a profound and distressingly widespread misconception that makes no sense if you think about it for a moment:
If Debbie transfered the $20 to John’s bank instead of keeping it in hers, John’s bank could lend it. Right? Do the banks have more money to lend one way or the other?
Bank lending is not reserve-constrained; it’s capital constrained. Take a dip in Modern Monetary Theory writings. They’re eye-opening.
steve
it doesn’t look like a misconception to me. the money in the bank isn’t doing anything until someone borrows it and spends it. but it’s still “in the economy” if for no other reason than debbie might decide to spend it tomorrow.
as for the government, it could borrow the money from debbie and “deficit spend,” if it wants to keep debbie temporarily out of the demand side of the market, or it could just print another 20 dollars, by hiring john to repair a few potholes, and then john might have the money to buy something from debbie…
short version… i think you are trying to “simplify and make obvious” that which is neither simple nor ever going to be obvious.
@Coberly: “it doesn’t look like a misconception to me. … debbie might decide to spend it tomorrow.
If she transfers it to John’s bank account (in exchange for his labor) the same thing is true. He might decide to spend it tomorrow. What’s different?
“i think you are trying to “simplify and make obvious” that which is neither simple nor ever going to be obvious.”
Actually, just pointing out what’s not obvious: the false belief that Debbie saving (not spending) *causes* there to be more money, or more lending.
Or to put it another way:
Saving does not cause investment (or lending).
Spending causes investment (and some borrowing to fund that investment). In fact some portion of spending is investment.
So, shifting to the sectoral definition of Saving (accumulation of real goods), Spending causes Saving.
Weird, huh?
Steve
I quite agree that saving does not cause there to be more lending. And i suppose that if you are arguing with those who believe that it does, i should just stand aside and let you.
But for me at least, your argument implies a simplicity that is not there.
I will add that I pointed out once on a blog (not this one) that “excess savings” led to the Great Depression. And was met with a universal “hunh?” How soon they forget.
I could also add that one of the great names in economics was going around saying that Social Security “reduces savings.” I thought this was pretty idiotic, but someone always repeats it just in time to keep people confused.
I think the idea that “savings” is needed for investment comes from a folk-picture of a hundred and fifty years ago or so when if you wanted to build a factory, you had to borrow money from a bank, which would have had no money to lend if people weren’t “saving” it.
I don’t think this was quite true even then, although “capital” was much more scarce then than it is now.
Now, for all i know, it is still superfically true… at least “lenders” and the big gambling games we call “finance” seem to need the savings of savers to keep their games running.
But this ignores all the complications, including the ability of both banks and government to create money out of (almost) nothing if they think they see a good bet.
I think you (Steve) might do better if you tried to educate people about the real nature of saving and investment, and left the “simple” pictures to the economists fairy tales.
Can government simply “create money”? Do they have to sell something like treasury notes to,get the money in the first place?
@Jerry Critter:
Under current institutional/legislative/legal arrangements treasury has to to issue debt to deficit spend. The Fed is not allowed to give Treasury (unlimited) overdraft privileges. So Treasury can’t just spend (create dollars) endlessly.
(I’m not sure what would happen if Treasury tried; would Bernanke bounce Geithner’s check?)
But the bond issuance is basically an artifact of the gold-standard days, when treasury securities were redeemable in physical gold.
Steve,
So, if I interpret your writing correctly, the answer to my question is “No”.
They’re required to but they don’t have to.