Nontrivial Pursuits

Nontrivial Pursuits links of interest:
Republican Nemesis
Economic Justice

Saving money is a wonderful thing, isn’t it?  If you can manage to save a decent amount, it can provide you with a measure of much-valued security.  Indeed, some people think so highly of the habit of Saving they refer to it as a virtue.  So is that what it is?  A virtue?  Well, let’s just ponder that concept for a minute.  What kind of world would we be living in if everyone were to start saving money and no one were to ever borrow again?

Well, we can be sure that one of the most celebrated benefits of saving money—-the opportunity to earn interest income—-would disappear.  It turns out that savers need borrowers.  So how can we say that saving is a virtuous act if it is necessary for some people to dis-save in order for the savers to benefit?

There is a certain ideal that all savers pursue as a sort of ultimate goal: to save a very large amount of money and then retire and live off their accumulated dollar wealth.  Isn’t that what all the financial experts out there are advising us to do?  But just ask yourself what the world would be like if everyone were to somehow become extremely rich in dollars one day and then we all decided to retire and live off our accumulated money wealth.

We’d all be able to enjoy lives of luxury, right?  Well, no.  What we would soon discover is that we actually possessed no real wealth at all because no one would be producing anything of value that we could buy. In order for savers to benefit optimally from the saving of money, they need to have a lot of other people out there who are not able to save like them, but who are forced to work for a living, instead.  

The Real Wealth of the economy is its productive output: the real goods and services that are produced by our combined work efforts.  The more we collectively produce, the richer we collectively are, in real terms.  It ultimately doesn’t make any sense for us to all seek to become millionaires, because we cannot all live off of the productive efforts of “others.” But that’s actually the Republican Party’s ‘solution’ to the problem of poverty, isn’t it?  

What we should all seek is to maximize the production of real wealth in our economy so that we can maximize our consumption of real wealth. Enhanced economic security is something we can provide ourselves with, but it’s not going to come from everybody finding a way to save more money. The good news is that we can collectively provide ourselves with something (financial security) that we cannot all individually hope to provide ourselves with.

There is yet another very important reason why the practice of saving of money is not always a good idea.  If everyone were to “perfectly embrace” the ideals of thrift that are endlessly promoted by voices within the financial community, the result would be an economic disaster.  That is to say, if all Americans stopped borrowing money and they committed themselves, instead, to the practice of putting off all purchases until they had saved enough money to pay cash for them, America’s economy would immediately collapse into an economic depression, perhaps one that would even exceed the Great Depression of the 1930’s.

Why do we know that this is an absolute fact?  Because we know that ALL JOBS IN THE ECONOMY ARE DEPENDENT ON THE SPENDING OF OTHERS.  Just ask yourself where the money comes from that pays for nearly every job holder’s income?  It comes from the SPENDING of other people.  An economic recession is defined as a period of time when there is a decline in aggregate spending (GDP).  When spending drops; jobs disappear.  That’s what happened during the Great Depression; too much SAVING was going on.  People who had `extra’ money that they could have spent, chose to save it instead.  Those who would have spent the money if it had been placed in their hands, did not have it in their possession.

There is no denying that—-all else equal—-an individual will benefit from saving money so long as not everyone else is also saving money.  But we need to understand that the practice of saving money is not a pure virtue because bad things can happen if too many people are saving too much.  Yes, go ahead and try to save as much money as you can, but understand that when there is any level of unemployment in the economy, the government is going to have to reduce total savings if it wants to improve the welfare of all.  The only issue then is which savers should be asked to give up some of their savings in order to help the national interest?  I say tax the savings of those who are in the best position to make a sacrifice: the extremely wealthy.

It may be prudent for an individual to save (or save more) in certain circumstances that are strictly defined, but it is ridiculous to refer to the act of saving money as a virtue.  So can we please stop referring to Saving as some kind of Absolute Good, one that a society can never get too much of?  If anything, economic history has taught us that exactly the opposite is true.

The Misunderstood Relationship Between Savings & Investment

James Kroeger

This entry was posted on Thursday, April 20th, 2006 at 2:27 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.