Savings/GDP up cuz govt revenue down… it’s a leakages thing
Update from John Aziz below…
I see a Brad DeLong post where he includes a post from John Aziz, which John wrote back in April 2013. The DeLong post is about a savings glut, and the Aziz post points to the rise in savings as a percentage of GDP. But John Aziz wrote…
“The actual cause of the desire to save rather than consume or invest is uncertain… demographic trend… psychological trend… shortage of “safe” assets… anticipation of deflation…. But whatever it is, we know that there is an extraordinary savings glut.”
It is easy to ascertain the cause of savings rising as a share of GDP. Here is a graph which makes it clear. (Data source is NIPA tables, by quarters)
National savings as a % of real GDP (brown line) has risen for decades, but so has consumption (yellow line) and imports (green line) as a % of real GDP. Therefore something must be falling in relation to real GDP. That would be the blue line, tax revenue as a % of real GDP.
The government has simply been lowering tax rates for decades.
The basic mechanism is that real GDP has leakages from consumption. The standard leakages are savings, taxes and imports. If you just lower the rate of tax revenue you will essentially make more money available for savings, consumption and imports. So the options that John Aziz gives in the quote above are creative meanderings. The actual cause is quite simple… the government is taxing less.
Actually, savings strongly reacts to a change in the rate of tax revenue, much more than consumption or imports. You can see the blue and brown lines just about mirror each other.
Update: John Aziz clarifies by twitter… “No; the SAVINGS index I use is a stock (idle money in bank accounts) the measure in that chart is a flow.” “Idle savings in the economy is not a component of GDP, even if I am measuring it against GDP.”
I agree with John about the increase in idle savings. It opens up the Financial Repression debate in the US. As in China, does low interest rates lead to higher savings? Is the same thing happening here? I will post on financial repression over the weekend.
i did not see a line for “investment.” it seems to me that if you are talking about a “savings glut” you must mean that people are “saving” (not consuming, or paying taxes) more than they (businesses) are investing.
and if that is the issue… and i think it ought to be… then the question is whether if the government taxed more it could invest more than the private sector is willing to invest at this time.
but that always gets us into a religious discussion about taxes and private enterprise which is sterile and stupid.
i am not sure that “stock” vs “flow” gets us anywhere… except to observe that when savings stops flowing into investment it becomes a putrid stock gradually disappearing and lowering the level of GDP (potential) along with itself.
and “idle savings is not part of GDP”
strikes me as a little suspect
those savings were created by people earning money by adding to GDP. the fact that they are “idle” means that they are not returning to the money cycle that keeps things going if not growing, but that doesn’t make them not part of GDP.
it seems to me that we have here a tendency to talk about words without bothering to try to ground ourselves in what they mean.
also… government has a role in this… either by investing itself when private investment is slack, or by creating conditions that will favor private investment… as by raising the wages of workers so they can afford to buy the things that businesses would create (and invest for) if they thought they had a market..
maybe there is a way to talk about this without stumbling over religious issues.
US Housholds are still in a deleveraging phase but the real equation here misses “investments”, both governmental and corporate, where public deficits mirrors private savings particularly in the business sector(not households). Investments in real terms have been stagnating since the 80´s. Corporations hoards money since the GFC began which is pretty obvious(see the brown line). The brown line(national savings) corresponds to “investments” according to “savings = investments”. Also real investments means real wage-growth. Wages in the US have been stagneting as well since the late 70´s. Globalization means outsorcing of investments and wages which have to be matched by consumtion and lately debts to further consume. End of game. Pretty simple. Try lowering taxes even more? Hoho….
Coberly and Christer,
Investment is an injection into the economy. I centered on the leakages. The leakages have to balance.