I’m not sure that saving exists.

Or rather, of course it exists, but I’m not sure what makes it “saving” as opposed to “consumption.” As a non-economist I’m sure any number of economists could explain to me why “saving” and “investment” are really separate from “consumption” but it seems to me in the final analysis to be a distinction without a difference, or at the very least confusing what’s really important with what’s decidedly not.

Most people work, and in exchange for work receive income, mostly in the form of money. According to traditional models, some, usually most, of that income is used on “consumption,” the purchasing of goods and services, and the remainder is “saved” – in fact, THE ORACLE defines saving as exactly that, deferred consumption. But with one exception, I’m not sure that really makes sense in a meaningful way.

Let’s say I take 10% of my income and put it in a savings account with my credit union. Tada! That’s “saving!”

Let’s say I take 10% of my income and go to “ContractMart,” my local neighborhood store where you buy pieces of paper that stipulate certain rights that you and ContractMart have. Let’s say I convince ContractMart that I want to buy one of their awesome contracts for the price of 10% of my income, and the terms of the contract stipulate that, at any point in the future I desire, I can demand a nominal amount of money equal to the price of the contract plus interest. And let’s say, for the sake of argument, that “ContractMart” is cushy with the local government and so is exempt from sales tax, and furthermore is cushy with the federal government and so is fully-insured, and thus my shiny new contract is guaranteed.

Is that saving or consumption? Let’s say ContractMart is really, really, really popular and cool, and I frame the contract and hang it on my wall, and it serves primarily as decoration, like a savvy book or a poster from a luxurious vacation or a pretty painting. Is that consumption?

Basically, I would argue yes. But I would argue that the former example, putting your money in a checking or savings account, is also consumption. I think for clarity of thought and understanding the best way to conceptualize consumption is as the exchange of money for something not-money. In that sense, all income is always consumed, and what is traditionally considered “saving” is just a large and important subset of consumption. Why is this important? Let’s follow the path of money.

You work, and your employer gives you money. You take a large chunk and give it to a landlord or the bondholder who financed the purchase of your residence. You take many other large chunks and distribute them to retailers, like grocery stores and various tchotchkerias, and to other businesses such as restaurants, theaters, etc. You probably give some to the bondholder who financed the purchase of an automobile and to a business that sells fuel for it. You probably give some to a cable company and a cellular company. But you have some left over. What do you do with it?

Well, if you’re like many people, you give it to a bank! And then what?

Well, hopefully the bank loans it out. But that’s such a judgmental term, loan. If I decided, like many a passionate Zionist, that I wanted to loan money to the State of Israel, wouldn’t you instead decide to phrase such a decision as deciding to “buy Israel bonds?” And indeed, would that be saving or consumption? But more to the point, if a bank “loans” out deposits couldn’t it instead be buying bonds? When a firm builds a factory they sell bonds to raise capital to finance an “investment.” Why not homeowners?

Can you see where this is going? Money is a hot potato – whenever you hand it to somebody, the last thing they want to do is just hold onto it. Even if they think they are, they aren’t – they’re exchanging what is truly money, cold hard cash, for something else, something that, while it might be very similar to money, isn’t quite. They are buying something, even if it’s a money-equivalent. Money itself keeps leaping from one hand to the next, nobody wanting to be stuck with it.

There are only two ways for money to “retire,” and that is at the very top or the very bottom. The latter would be like grandma stuffing cash into a mattress; intuitively in the modern era that seems unlikely, as most people with excess money are banked and those who aren’t tend to prefer to stash gold. The other way is in bank reserves, money deposited with a central bank. That is the true “black hole” or final resting place of money – a place where money really can stop. According to the Federal Reserve, there are currently $1.5 trillion in excess reserves stuffed in the world’s biggest mattress. That money is infinitely safe but its velocity is for-all-intents-and-purposes zero; since the Federal Reserve is that magic and grand institution that wills dollars into existence, it doesn’t truly spend those deposits on buying bonds the way a normal bank might, since its purchases are not constrained by the amount deposited and it could part with all deposits without it affecting their normal business (although that might influence their policy decisions going forward).

What all this does, IMHO, is reduce the number of meaningful economic questions. Fundamentally, I believe that economic growth is about the momentum of money – its mass, or supply, multiplied by its velocity. This to me is a very similar, if not exact parallel, to NGDP growth.

This to me also renders the distinction between “saving” and “consumption” mostly moot. It doesn’t matter if individuals spend their money on buying shiny baubles or tasty foods or if they spend it on what are essentially insured promissory notes from banks, ie, deposit it; what matters is if the money keeps moving. When it doesn’t, as you can see here, the economy shudders to a halt. Of course, if the money is moving too fast that is both a symptom and a cause of over-inflation – people should want to rid themselves of cash but not near-equivalents for money, like deposits – but this against parallels NGDP, where you target a level and trend and prevent it from both exceeding these measures and failing to meet them.

However, I think this also has much more narrow political connotations. Our tax laws, as anyone paying attention to the fascinating Republican nomination battle can surely attest to, treat income earned from “investments” as different from “wages,” and thus try to incentivize “saving” over “consumption.” While the fairness of it is heatedly disputed, the theory underlying this, it seems to me, is oft-unchallenged by progressives, who I think ought to take more issue with the whole idea, because, even more than tax cuts for the rich, this is true supply-side economics.

Assume that I own a factory that makes iWidgets, a popular update on the classic example from Econ textbooks of yore. My iWidgets are popular enough, in fact, that I am considering borrow money – ie, sell bonds to raise capital – to build a second factory to create even more iWidgets. Why?

A “saving”-oriented or supply-side theory would tell you I am being “pushed” – that a large amount (even, say, a glut) of saved money is looking for a home and has found my firm and my product. We have been assessed as a safe risk and thus interest rates are low, making it a good decision for me.

A “consumption”-oriented or demand-side theory would tell you I am being “pulled” – that consumers really like my iWidgets and are clamoring for more, so much more that increasing production is profitable for me so long as a reasonable interest rate is available to finance the expansion of my productive capacity.

Now, I think the latter theory is by far the more credible and convincing one. Certainly I think it is hard to imagine a businessperson taking risk to increase supply without at least some significant assurance that more demand exists for their product. Yet this is exactly what received wisdom that is almost frighteningly common would have you believe – that we should encourage people to consume “investment” products as opposed to “consumption” products because that is the driver of economic productivity. This logic justifies allowing wealthy people to both receive large tax cuts – because they will invest the money, thus creating jobs – and for capital gains to be taxed at a preferable rate relative to other wages – because that incentivizes “investment” over “consumption.”

I think this is all terribly wrong. We should be putting money in the hands of people who want to consume it.

Or think about it this way – I, myself, can “defer my consumption” by putting money in a bank. But a society absolutely, cannot, defer its consumption; it simply produces less, and thus has less. So a choice of some individuals to “defer their consumption” is from the birds-eye perspective a reallocation of consumption and production away from some things and towards other. Certainly it is possible for a society to consume/produce things whose full rewards won’t be felt until later, such as long-term infrastructure policies. But that is a choice about allocation (or at least it should be, since the economy should be producing maximal output if money is correctly managed). It is not a choice for a society to “save.”

Thus, theories that argue that “saving” or “investing” drive economic growth are wrong. Consumption drives economic growth, which means that production drives growth, which means that labor drives growth, not capital. This means that a very progressive tax structure and redistribution of income (though not wealth) is not only a recipe for justice, but also for robust economic growth as well. It is why income inequality depresses growth and productivity.

This lesson, at least, is something we used to understand better in this country, but seem to have forgot.

UPDATE: Re-reading this later, I should specify that this is all about what drives short-term economic growth, not long-term economic growth.

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