# Tyler Cowen Asks if Savings are Overrated

Tyler Cowen poses the latest from Michael Mandel as a question to his class as well as to the rest of us:

So what would be the payoff from all that thriftiness? A reasonable rate of return on investment, after depreciation, is roughly 7%. So $1.5 trillion in extra assets would have a return of about $100 billion a year. That $100 billion is roughly 1% of an $11 trillion economy. Over ten years, then, complete elimination of the trade deficit might–might–have added a tenth of a percentage point to growth. That’s a good measure of the size of the virtues of savings–roughly a tenth of a percentage point on growth. That’s 0.1 percentage points. To put that in perspective, the estimates of long-term productivity growth have risen roughly a full percentage point over the past decade. The effects of technology more than swamp the effects of savings.

If Mandel is trying to suggest that Mark Thoma and others are wrong when they advocate more savings, let me suggest that Mandel is confused. The old (1956) Solow model of growth consider savings (and capital accumulation) and technological progress as independent determinants of growth. More recent models of growth note that embodiment of new technology occurs with new machines – so investment and technological progress are complements. But Mandel concedes this and poses the question – why not borrow rather than save.

Keynes noted that the decision to save and the decision to invest for individuals are separate decisions. However, world investment is constrained by world savings. We can imagine a two-country model where one nation (let’s call it the United States) invests, while the other country (let’s call it China) saves. The fact that the first nation has to pay the second nation interest on its borrowings means the second nation gets some of the benefits from this investment. But let’s at the facts. China’s investment/GDP ratio is higher than our investment/GDP ratio. In fact, our net investment is almost solely financed from borrowing. So the facts show that U.S. is contributing very little to the world pool of savings.