Does It Matter that Other People Save? Yes. Does the Nationality of these Savers Matter? No

by Don Boudreaux on October 22, 2007

in Balance of Payments, Standard of Living, The Economy, Trade

Arnold Kling insightfully points out that among the distinguishing features of economics as it is taught and researched here at George Mason University is that we resist the temptation to treat abstract collectives as acting, relevant beings.  The typical GMU economist doesn’t believe that just because a group of people are conventionally called by a certain name – “Americans,” or “Ukrainians,” or “Taiwanese” – that such a designation carries much economic relevance.

Nowhere is the need to “lose the we” more important than in discussions and analyses of international trade – and in particular in discussions and analyses of the so-called “trade deficit.”

Nearly every American is part of the economy that can, without risking too much misunderstanding, be called the American economy — or, alternatively, the global economy.  But also part of this economy are foreigners who sell their goods and services to Americans – so too are foreigners who buy American-made goods and services – so too are foreigners who invest in dollar-denominated assets.

It’s easy to confuse Americans getting poorer with the American economy getting worse.  The latter does not necessarily follow from the former.

Suppose that 100 percent of Americans are irresponsible spendthrifts – something like the teenager who, upon receiving his first paycheck, spends it all on beer and rock concerts.  Clearly, unless this teenager changes his habits, prosperity beyond the norm will not come his way.  But if American institutions – work habits, trustworthiness, laws, structure of government, and so on – remain attractive to investors, then capital will continue to be invested in America.  New jobs will become available, jobs offering higher and higher pay.  New products and services will be produced, and their qualities will generally rise and prices generally fall over time – becoming more and more affordable even to spendthrift Americans.

Of course, in this scenario all investments will come from non-Americans – from foreigners who, being more prudent and patient than Americans, save and invest part of their current earnings in the economy of which Americans are part.  This economy thrives even if (in this unrealistically extreme example) no American enjoys the fruits that come from owning assets deployed in a vibrant economy.

Americans thrive more than they would thrive if foreigners didn’t invest in America (or if foreigners invested less in America).

Here’s good news for all of us who live in the United States: as long as lots of people are willing to invest in the U.S. economy, we will enjoy benefits over time even if each of us Americans is a spendthrift.  It should make no difference to me or to you if those people who do invest in the United States have passports issued by Uncle Sam or have passports issued by some other government.  If you are a spendthrift, you will not, of course, benefit from this thriving economy as much as you would if you became one of the savers and investors.  But whatever is your own personal rate of saving and success at investing, your material prosperity will be higher the greater is the willingness of other people – including foreigners – to invest in the American economy.

Put differently, if you become the only American willing to save and invest, and if foreigners (for whatever reason) stop investing in the American economy, you will likely be much worse off over time than you would be if you continue your spendthrift ways and foreigners continue their saving and investing-in-America ways.


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