Identity Games: Saving ≠ Saving? Whodathunkit?

I finally figured out a simple way to explain my confusion (and that of many others, including many economists) with the whole Saving issue. I may also have figured out a useful solution to that confusion, which I present at the bottom here for my gentle readers’ delectation and denunciation.

Econ profs: I’m really curious. Do you think this post would help your intro students understand this stuff?

First: The accounting’s fine. Of course. But for some not-crazy reasons, the definition of “Saving” changes in the course of the accounting.

Thinking of the “real” sector for the moment, for simplicity and clarity. For each of the economic units at the bottom level of that sector (households and nonfinancial businesses), Saving means money saving:

(1) Saving = Income – Expenditure

But at the top, the level of “sectoral” saving, Saving means saving of real goods:

(2) Saving = Income – Consumption Expenditures

Or in words that more aptly describe what’s being depicted:

(3) Saving = Production – Consumption

(Reminder: Consumption Spending + Investment Spending = Expenditures = Income = Production)

Explanatory aside: There’s Gross or Net Saving, depending on whether Consumption just includes Consumption Spending (on goods that are bought and consumed within the period), or also includes Consumption of Fixed Assets — the very real “depreciation” of those assets. Gross is long-lived goods produced; Net is long-lived goods added, above and beyond what’s “consumed.”

Back to identities: Unlike every other measure in the national accounts, if you sum up the money Saving of all the bottom-level units, it doesn’t equal Saving for the sector. Rather:

(4) Sectoral Saving = Units’ Combined Money Saving + Investment Spending*

Investment spending, of course, causes the creation of real, long-lived goods. But this is the thing that has confused me from the get-go: Saving is (savings are) some combination of money and real goods? Aren’t financial assets supposed to be representative of, proxies for, the real assets? (Equally confusing: economists’ insistence on talking about “capital” as if it were some undifferentiated, homogeneous or vaguely contiguous lump of real and financial capital.)

Here’s what you need to know to sort that out: You know that money saving? It’s zero.

As JKH has quite rightly pointed out, if Sectoral Saving means money saving, “one stumbles upon the unhelpful conclusion that global saving…is identically zero, which is not very productive.” Income = Expenditures, right? One person’s spending is another’s income. So for the world or any closed sector (no net flow in or out), Money Saving (Income – Expenditures) must equal zero.

If you plug that zero into (4), voila, you get:

(5) Sectoral Saving = Investment Spending

This makes sense in the accepted sectoral definition; investment spending increases the stock of real, long-lived goods — Sectoral Saving. But if you don’t get confused when Spending = Saving, you’re a better soul than I.

While JKH is (identically!) correct, I completely disagree that this is “unhelpful” or not “productive.” Because in fact a money-saving approach perfectly depicts the actual situation in a way that’s easy to grasp — which is important given that so many find it so hard to grasp. If there’s no flow in from other sectors (Government and Foreign, ignoring the financial sector for the moment), the units in the real sector, in aggregate, can’t save money. You get this familiar, MMT-favorite identity:

(6) Government Deficit + Trade Surplus = Real Sector Money Saving (Net Acquisition of Financial Assets)

When you’re looking at the actual accounts, Money Saving doesn’t equal zero. Because we all know: households and businesses save money — but only, in aggregate, if there are inflows from outside (which there are). If Sectoral Saving meant money saving, as it does at the bottom, unit level, what you see at the top would be the non-zero sum of what you see at the bottom.

It’s not crazy to think about sectoral saving as money saving. Both the NIPAs and the FFAs provide a sector-level measure of Personal Saving (households), which is unequivocally money saving: Money Income – Money Expenditures. (Nobody would say that household saving is “stockpiling of real goods.”)

Unfortunately the accounts don’t have a similar measure of money saving labeled Business Saving, which would be this:

(7) Business Saving = Income – Expenditures – Distributed Profits = Undistributed Profits

(This because Distributed Profits count as Income for households, so they contribute to Household/Personal Saving, not Business Saving.)

Why no such Business Saving measure? Because this is the turning point, the crux, of the definitional legerdemain. Within the real sector in the NIPAs, businesses only do Investment Spending, and only businesses can do Investment Spending. (Households only do, only can do, Consumption Spending.) Is Investment (aka Business) Spending an Expenditure, or isn’t it? Is it Expenditure or Saving? If there were a measure here called Business Saving — money saving — then matter (real goods) would collide with antimatter (money), and the Universal Accounting Construct (perhaps the whole universe!) would explode and vanish in a fiery conflagration.

Okay, fine, hyperbole. But really: we know that businesses save money. You’ve no doubt noticed that corporate cash balances are at historic, all-time highs. It’s hard to pull that off if they’re not saving money. It would be nice to see that money saving by businesses clearly presented as such, in so many words, in the national accounts. It could then be totalled up with Household Money Saving to show Real- (nonfinancial) and Private-Sector Money Saving.

I’ve got more to say on all this, but I think I can clarify best by suggesting a different way of thinking about it, using different words/labels/definitions that might cut this conceptual Gordian knot, and help people better wrap their brains around the national (and world) accounts.

I’m going to talk in terms of the NIPAs here, and about the real sector, because the constructs are different in the FFAs, adding the financial sector makes things more complicated, and I want to be perfectly clear.

The basic problem: we’re short a word. We have more things to describe than we have words. So I’m adding one.

Whenever you see Saving in the NIPAs (except “Personal Saving”), replace in your mind with:

 Accumulation (of real goods)

 When you think about Saving, think money saving:

Household/Personal Saving (Income – Expenditures)
+ Business Saving (Income – Expenditures – Distributed Profits = Undistributed Profits) 

Adopting those labels, when you see “Investment,” think:

 Spending that adds to the Accumulation measure


 Spending that doesn’t add to the Accumulation measure

And here’s the crucial point:

Neither Consumption Spending nor Investment Spending adds to or subtracts from the Saving measure. Not directly.

Each of these spending flows increases Income and Expenditure simultaneously and equally, so they can’t increase Saving (which is the difference between the two). Sectoral Saving only happens if there are inflows to the sector.

If you want to talk about indirect effects (incentives, constraints, emergent properties, etc.), you’ve left the backward-looking realm of accounting, and entered the world of Economics, Psychology, Sociology, Dynamic-Systems Theory, and a whole host of other disciplines. Accounting can never tell those disciplines when they’re right. It can only, and only sometimes, tell them when they’re wrong.

In that backward-looking world, we can say that X% of spending in a period was Consumption Spending, and the rest was Investment Spending. But that tells us exactly nothing about what caused the mix. We can’t say from the accounting, for instance, that if there had been less Consumption Spending, there would have been more Investment Spending. The result might just have been less spending overall (even, perhaps, less Investment Spending), so less Income, and less Production (allowing for the buffer stock of inventories, though that looms ever smaller as our economy goes past 80% services, and produce-on-demand supply chains for physical goods get ever more efficient; the production comes after, and is caused by, the expenditure).

This last point — that spending (of either type) doesn’t reduce sectoral saving — is crucial because failure to understand it lies at the root of things like the ridiculous loanable funds model, the idea that more individual money saving (not-spending) causes more investment, the notion that consumption spending takes resources “out of society,” and many other evil and foolish economic misconceptions that I might encapsulate somewhat trivially with two words: “trickle down.”

Also realize: When you look at actual data for the real sector and think about it using these terms, Saving and Accumulation (née Saving) won’t show any kind of obvious relationship, except that they both generally grow over time with the economy.

That’s because the sector isn’t closed. There’s lending/borrowing to/from the other sectors, and loan payoffs in both directions — summing out to Net Lending/Borrowing — and crucially, trade imbalances, and government deficit-spending into the real sector, with money created ex nihilo. (The latter being the ultimate though not necessarily proximate source of real-sector money saving, a.k.a. Net Acquisition of Financial Assets.)

For the (open) real sector over the long term, Income > Expenditure. Hence: money saving.

For those who have been confused as I have been (and who admit it), this thinking and terminology might make it easier to think about important questions of (macro)economics — how personal/business saving relates to investment and production, the role of debt and equity financing and the financial industry in economic growth, the nature of “demand,” how the stock of financial assets (so-called “financial capital”) relates to the real capital stock, etc. I’d love to hear your thoughts.

Before I go, one more thought: After coming up with this “accumulation” notion/usage, Very Little Googling revealed that (no surprise) it’s hardly original. It’s right there in Volume I of Das Kapital. (I just discovered this? Hey, I’m self-taught, with the resulting predictably spotty/spotlight reading background. I’m working on it!)

And let’s not forget: It was the 1930s. Kuznets and co. were developing the national accounts, and they were devoted capitalists. They’re gonna use Marxist language, much less concepts and theory? In the National Accounts? Of The United States of America? Not gonna happen.

Just a notion. But it does make sense…

I said at the top that Saving in the national accounts is labeled the way it is for not-crazy reasons. Some who are better-versed in Marx and his (far more cogent) successors than I am, might beg to differ with me.

And I might very well agree with them.

That’s the kind of normative, rhetorical, and ultimately political insight and implication to all this seemingly mundane and purely “positive” accounting stuff that I’d like to write more about in future posts. Thanks for listening.

* For those who are thinking S = I + (S – I): right. Writing and rewriting this post (over and over and over) finally helped me internalize it.

Cross-posted at Asymptosis.