by
James Kroeger
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One of the great analytical achievements of the
modern era has been the use of mathematical tools to enhance our
understanding of various phenomena. Unfortunately, the existence of
these tools has not guaranteed that they will be employed with sound
methodologies or that the data collected will be properly
interpreted. The purpose of this essay is to point out how flaws in
methodology and the interpretation of data have led to bad
[economic] policy.
Savings
Many economists with good intentions are
currently convinced that America ‘saves too little’ because they've
noticed that the federal government's (NIPA) measurement of the
'National Savings Rate' has been declining over the past few
decades. What is not clear is why these analysts have ignored a
more direct and far superior method of determining whether or not a
society is ‘saving too little.’
Among the most basic of the fundamental truths
that economists teach to their students every semester is the
logical statement that All Income Is Either Saved Or Spent.
There is simply not a third possibility. From this axiom, it
follows logically that (1) all money not saved is spent and (2) all
money not spent is saved. It also means that saving can only be
increased by decreasing spending and that spending can only be
increased by decreasing saving, all else equal.
Now ponder the implications of another
fundamental economic truth, one that all economists accept without
question: All Jobs In The Economy Are Dependent On The
Spending Of Consumers, Firms, Or Governments. Since all
jobs are dependent on spending, if aggregate spending were to drop
significantly, jobs would disappear. That is to say, the economy
would go into a recession. Alternatively, if aggregate spending
increases---all else equal---jobs will be created.
When we recognize both of these fundamental
economic truths at the same time, we are led logically to the
conclusion that the only time we can legitimately complain
that 'too little saving' is taking place is when the economy
is booming, there is zero unemployment, and finance people are
screaming at the top of their lungs that hyperinflation is
threatening. If there is any amount of unemployment in the
economy, we can know with absolute certainty that a net increase in
aggregate savings will---all else equal---cause a loss of
jobs.
I suspect that many of the economists who
currently claim that America needs to save more do not
realize that they are actually saying that our nation needs to
increase unemployment at a time when there are already
not enough jobs available for all who need them. This is equivalent
to saying that a drop in Real Wealth production is needed in order
for us to increase our nation's aggregate savings. They don't seem
to understand that, if we want to reduce unemployment
(create/consume more real wealth) we must---all else equal---decrease
savings (or tax/spend some money that has been saved) because we
need to spend more.
So why is it that we cannot depend on the
National Savings Rate to tell us if we are saving too much or too
little? Because it only attempts to tell us what percentage [of a
certain measurement of] national income is not being spent
[at least according to a certain measurement of total
spending]. Whether they realize it or not, “We're saving too
little!” economists are guilty of subscribing to the famous More Is
Better Fallacy. They believe that a declining Savings Rate is a bad
thing because they believe that---at all times---'the more we save,
the better off we are.’ It is a fateful error.
The practice of saving money is not a pure good
that always leads to good consequences, no matter what the economic
circumstances. The Great Depression occurred for only one
reason: those who had money in their possession that they could have
spent, chose to save it instead. Those who would have been
happy to spend the money did not have it in their possession.
The only reason why the practice of saving money
does not regularly do great harm to the economy is because most of
the money that is saved is lent out to others who will spend it.
This helps to ameliorate much of the damage that the practice of
saving money would otherwise inflict on the economy, but not all of
it. There is always a net leakage of money out of the
economy whenever money is saved. One major reason: any money
that must be held by banks to satisfy the Fed's Reserve Requirement
is money that is not returned to the economy that was once removed
by saving.
Perhaps the biggest flaw in the NIPA
measurements is the fact that capital gains income is not included
in calculations of total national income. This, in spite of the
fact that capital gains income is money that can be, and is,
either saved or spent. The BEA's calculation of the national
savings (total national income minus total national spending)
therefore ends up understating the total percentage of all income
that is being saved (not spent). If the spending numbers are
dependable, then the higher income numbers will produce a higher
calculated savings rate.
The only ‘rate’ the government calculates that we
can rationally use to state whether or not our nation is
saving enough is the unemployment rate (and yes, even
that measurement is flawed). If we actually had an accurate
unemployment rate to work with, we could know with certainty that,
when the unemployment rate is positive, we are saving too much.
When the unemployment rate just reaches zero, we could then
say that our rate of savings is optimized. If the
unemployment rate is zero AND there is ‘too much inflation’, then we
would be able to say with confidence that we are saving too
little.
Inflation
The idea of trying to measure inflation is
a good one. Theoretically, if we could measure inflation
accurately, we would be able to say with great precision just how
much we are ‘getting ahead’ or ‘falling behind’ with respect to the
Cost Of Living. The only problem is that the measurement we use
(the CPI) is so poorly thought out, it is almost completely
worthless as a tool of 'adjustment.'
Consider the fact that it is quite possible for
different socio-economic groups to experience different inflation
rates. This is almost always the case. Since the Republican Party
began to cut the income tax rates of the wealthiest income earners
in American in the 1980's, we have seen very substantial price
inflation in those markets that serve the rich, while average prices
for many in the lower classes have held somewhat steady or have even
dropped somewhat (due to imports of cheaper foreign products and the
loss of good paying jobs).
Because this variance in inflation rates across
income groups exists, a far more useful CPI publication would
provide different price index numbers for different income groups
(meaning different ‘market baskets’ that are relevant to the
different income groups). This kind of data would require an
enhanced data-collection effort, but the result would be worth it.
With data on the varying inflation rates that affect different
income groups, policy makers would be able to fashion policy
proposals that respect the varying circumstances of different
citizens.
Once we have come to realize that it is actually
possible for one income group to experience significant inflation
while another income group is experiencing deflation, it no
longer makes sense to compile an 'average' price index that
supposedly affects ‘everyone.’ Doing so up to now has buried a lot
of important information behind a single number. If the BLS were to
publish a spectrum of index numbers that pertain to maybe ten
different income groups, both citizens and policy makers would have
a much clearer picture of what is happening to the economy.
_______________________________________________
Related Economic Analysis:
THE
RELATIONSHIP BETWEEN SAVINGS & INVESTMENT
MAKE THE AMERICAN PEOPLE RICHER
ARE INCENTIVES NEEDED TO
ENCOURAGE INVESTMENT?
DO TAX CUTS STIMULATE THE ECONOMY?
ECONOMIC
POLICY
