[ExI] Savings and wealth/was Re: More on Health Costs

[Dan]

--- On Thu, 5/28/09, Stathis Papaioannou <stathisp at gmail.com> wrote:
> 2009/5/29 Dan <dan_ust at yahoo.com>:
> 
>> A reductio ad absurdum of the Keynesian view is
>> if spending to wealth worked, why wait for a
>> recession?  Why not always keep immediately
>> consuming our total incomes -- never saving at
>> all?  (Saving is really postponed consumption,
>> but it's from such postponed consumption that
>> all economic progress aside from pure luck arises.)
> 
> If everyone saved and no-one consumed, save for the
> necessities of
> life, why would anyone invest in anything other than the
> necessities of life?

Well, people usually save for future consumption -- not merely to work ever harder, but live at a subsistence level.  So, e.g., someone might save for a down payment on a house, for her children's college, for a new car next year, a cruise, start a business, invest in the market, retirement, or even vaguely for the proverbial rainy day.  The role of entrepreneurs is to attempt to forecast what people will want to buy in the future, so, in a free economy and within the limits of entrepreneurial error, they should be more or less successful at this -- and not result in the bugbear of Keynesians, original and New, where people mindless hoard savings for no reason at all.

> Interestingly, the savings ratio correlates
> negatively with
> economic growth in OECD countries:
> 
> http://www.forium.co.uk/Savings-Accounts/Saving-Account-News/Savings-ratios-over-the-decades.html

I think it's a bit more complicated than that.  In fact, it looks to me like some of these people are acting rationally: saving more when there's a recession to not make serious errors.  For instance, right now in the US prices on homes and other durables are fairly low.  Should you go out and buy a house?  Well, maybe, if you can afford to buy one now and wait, but what if you don't have a whole lot of money to begin with and feel you might be out of work soon?  In that case, you might just save as much as possible -- rather than spend even if prices are pretty low now for these items.

> But this doesn't mean that maximal consumption is
> necessarily good.

It's not really a matter of good or bad, but what kind of future you want.  If you maximally consume, expect, on average, to not improve and to be at the mercy of whatever problems arise.  Some people prefer this and that's their decision.  Others prefer to save a lot perhaps to retire as early as possible or to leave a bigger share to their family or to donate or whatever.  Most are probably somewhere between the two extremes; the only problem for the economy is not someone or some group dictating a level of savings and spending for all, but coordinating these preferences.  Free markets would do this much better than the alternative; in fact, the lesson of recent decades should be that a command economy in this area leads to business cycles and generally doesn't work.

> The world would have been better off if China consumed more
> and the US saved more.

It depends on what's meant.  If we want all around more wealth and higher productivity, it'd probably be best if all saved more -- the Chinese, the Americans, and everyone else.  I don't mean saved every last cent above the minimum needed to keep alive, but just more than in recent decades.  (Believe you me, my personal preference is to save some, but spend some too: I like to have a good meal, vacation in nice places, wear nice clothes, and have various entertainments.  I don't judge people as evil because they have similar or difference preferences than me.)

Regards,

Dan