Saving and "Government Saving"

Steve Randy Waldman and Scott Sumner (plus many others, linked from Steve’s post) wade in on notions of saving and investment.

(I’m endlessly amazed that the best econothinkers on the web — add Nick Rowe, Andy Harless, David Beckworth, Josh Mason, and many others to the list — constantly feel the need to think, re-think, and debate this fundamental economic concept. Economists haven’t figured this out yet?)

I’d like to reply to one assertion of Scott’s, because I think it cuts to the crux. This time I’ll keep it brief, at risk of obscurity. Scott:

In every case where an individual seems to be saving more and yet investment doesn’t rise, someone else is dissaving.

Scott’s far from alone in asserting this; it’s central to Krugman’s thinking.

But: This only seems right if you’re imagining an isolated private domestic nonfinancial sector, in which no new financial assets can be created. (Essentially the “loanable funds” notion.)

If you bolt on a (international) financial sector that constantly creates new/additional financial assets, and (especially) a sovereign fiat-money-issuing government sector (with the arabesques of bond issuance and OMOs), and other sovereign- (and bond-)issuing governments worldwide, and account for flows to and from those sectors, I don’t think the statement is true.

Because: “government saving” (in particular) is a meaningless concept, akin to a bowling alley “saving” points.

Cross-posted at Asymptosis.

Tags: Comments (1) | |