Four Saving Fallacies

A recent comment section exposed a number of fallacies about saving:

1.  One fallacy is that one can prove a definition wrong by pointing to facts about the economy.  This is not correct.  Textbooks define saving as being equal to investment, i.e. saving is the funds used for investment.  Indeed this is part of another textbook definition, gross domestic income (C + S) equals gross domestic product (C+I).  One may not like those definitions, but pointing to real world examples to disprove them just won’t work.  Thus if someone says: “Suppose I put money in the bank, and the bank doesn’t invest the money,” it just makes my eyes glaze over.  I know immediately that I’ll disagree with your characterization about what’s happened to either S or I.  There is no debate about whether tautologies are correct, just about whether they are useful. If instead you say: “Here’s why I think a different definition would be more useful, more enlightening,” then my eyes will light up.   That is, until you start talking about the paradox of thrift . . .

2.  People confuse the individual with the aggregate.  In every case where an individual seems to be saving more and yet investment doesn’t rise, someone else is dissaving.  Thus when I loan someone (or institution) some money that they don’t invest, then I save and the borrower dissaves.   Aggregate saving is unchanged.

3.  What if I put cash under the bed?  I presumably get the cash from someone else.  So if me holding more cash is saving, then someone else holding less cash is dissaving.  If the government produces more cash and buys bonds, then it nets out to nothing if you view cash as a government liability.  The more interesting case is if we view cash as a real good, and the government feeds my appetite to hold more of this real good.  In that case it’s part of the capital stock but not a government liability, and real money hoarding means our real stock of transactions media goes up.  An OMP is both government saving and government investment.  That may seem an odd way to think about it, but it’s consistent with the definitions.  (Mike Sproul uses the liability approach; I use the real good approach.  S=I either way.);

4.  The argument for the paradox of thrift is that a higher propensity to save results in lower nominal interest rates, lower base velocity, and lower NGDP.  There are two reasons why I view this concept as being uninteresting:

a.  Even if correct, it would make more sense to call the problem “too much base money hoarding” not “too much saving.”

b.  It only applies if the Fed targets the money supply.  But they don’t, they target inflation (or inflation plus employment).  In that case the Fed would adjust the money supply to offset any change in V.  Now I suppose one could construct a model of “Fed fail,” but now we’d be far removed from the paradox of thrift, and would instead be obsessing about zero bounds and fear of unconventional policies, etc.

About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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