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The (Partial) Irrelevance of the National Savings Rate

Does the national savings rate matter?

Seems like a no-brainer. “Yes!” is the instinctive answer.

My answer is “It does matter, but not as much as people think.”

Arnold Kling, here, puts his finger on the way that the national savings rate matters most – namely, as a source of financial security for each American that keeps him or her from agitating and voting for greater tax-funded welfare:

The European scenario can be avoided if the American people can be persuaded to maintain financial independence through prudent saving. The more that people save for contingencies such as job transitions, retraining, college education, retirement, and health care, the lower will be the tax burden on the hard-working and the thrifty.

But apart from this political effect, the relevance of the national savings rate is overblown. Like so many other faulty ideas, overestimating the importance of the national savings rate is due to analyses distorted by sloppy aggregate concepts.

This sloppiness is ever-evident in discussions of the “trade deficit” (which, in the best discussions, really means the current-account deficit). The faulty analysis goes like this: a current-account deficit means that “we” (Americans) are spending more on imports than we are earning on sales of exports. If “we” saved more, we would buy fewer imports (that is, consume fewer goods and services) and, thereby, invest more of our wealth. The result would be a greater stock of productive assets such as more factories, more R&D, and more new-business start-ups.

Before I go on, let me be clear that I endorse savings – both as a good thing to do personally, and as an activity that is good for the material productivity of the economy (assuming, of course, that financial markets work reasonably well, as they do in the U.S.). When I save and invest, my family and I are better off, for obvious reasons. When my neighbor saves and invests, my family and I are better off because his savings creates more productive assets that raise worker productivity and increase output and lower real prices.

But it’s important to understand that I benefit no less when a foreigner saves and invests dollars in the United States than I benefit when my next-door neighbor saves and invests dollars in the United States. Consider these two alternative scenarios:

Scenario 1: Foreigners invest nothing in the U.S.; Americans save $10B and invest these funds exclusively in dollar-denominated assets. My own personal rate of savings, however, is zero.

Scenario 2: No American saves and invests but foreigners invest $10B in dollar-denominated assets.

I am no worse off in the second scenario than I am in the first. For my own personal good I probably should save more. This fact is equally true in both scenarios. But given my personal savings rate (whatever it is), it makes no difference to me if the new factory in town or the additional R&D by 3M, Inc. is paid for with dollars that come from my next-door neighbor or with dollars that come from the Netherlands or Nepal.

This fact is true even though in the second scenario the U.S. runs a trade deficit and in the first the U.S. does not run a trade deficit.

Insofar as government does not interfere with foreign trade, the nationality of those doing the savings and investing domestically makes very little difference (apart from the effect identified by Arnold Kling).