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)

 savings of gdp

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.