I’ve noticed that many others, like me, are puzzled by the mechanics of the Saving=Investment accounting identity. How do household savings get instantly and perfectly intermediated, in a period, into investment spending — the purchase/creation of long-term productive fixed assets?
An Aha! for me: According to Krugman’s textbook, they don’t.
First a correction: “The saving
s[sic]-investment identity is a fact of [the] accounting [methods developed in the 30s by Kuznets and company to model production of goods and services the national economy].”
But that aside.
If people spend less than producers expect in a given year, the producers create too much product, and it builds up their inventories. That’s easy to understand. (It’s easier if you think about the producers instead of the car-dealer intermediaries that Krugman talks about.)
In the NIPA model, that inventory is counted as “investment.” This makes sense as far as it goes — that inventory is stored real value, stuff that can be consumed/sold for consumption in future periods. As Mankiw explains it in his textbook:
But this explanation also pretty much obliterates the widespread and sloppy notion that increased saving (“not spending”) results in — causes — more productive “fixed investment.” The increased “investment” resulting from increased personal savings is used to expand inventory. The causations/incentives driving fixed investment are utterly other.
This also makes sense: when people are spending less (are “saving” more), does that spur producers to invest more in their businesses — buy/create more fixed assets?
Both recent and immemorial history suggest quite the opposite.
Cross-posted at Asymptosis.