On Savings

by Don Boudreaux on June 5, 2008

in Balance of Payments, Economics, Myths and Fallacies, The Economy, Trade

One of our age’s truly great communicators of economics (as well as a first-rate economic scholar) is Steven Landsburg ("the Armchair Economist").  Steve’s review, in today’s Wall Street Journal, of Ronald Wilcox’s Whatever Happened to Thrift? is a gem.  Here’s a slice:

The tax code alone is reason to believe that Americans
don’t save enough. Mr. Wilcox offers a menu of other reasons, not all
of them convincing. He repeats the canard, popularized by Robert Frank
of Cornell University, that "keeping up with the Joneses" is a force
for excessive consumption. One could argue equally well that it is a
force for excessive saving. If I am trying to outshine the neighbors’
Mercedes, I might well decide to be extra frugal until I can afford a
Rolls Royce.

Mr. Wilcox makes another fundamental error when he
points to high foreign savings as a cause of excessive U.S.
consumption. When foreigners save, U.S. interest rates drop. This makes
it smart for Americans to consume more. "More" is not always the same as "excessive."

I add only a point that I’m certain that Steve agrees with, namely, the freer are trade and international capital flows, the less meaningful it is to speak of national rates of savings.  As a worker I care whether or not my employer is modernizing his operations to increase my productivity; I don’t care (or shouldn’t care) whether the savings used to finance such investments come from Dallas or from Dubai.  As a consumer, I care that savings is available to finance innovations and the production of attractive goods and services; I don’t care (or shouldn’t care)  — as long as trade is free — if any particular such investment takes place over here or over there, or about the nationalities of the persons who supply the savings to finance this and other investments.


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