Saving and Identities
Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.
Pointer from Mark Thoma.
Keynesians believe in the paradox of thrift. Saving never increases investment. Instead, if any sector of the economy tries to increase saving, the result is to reduce income. From this perspective, any sector that increases its saving is doing harm, and often Keynesians will go so far as to attribute sinister motives. This means that when the balance of savings shifts, the Keynesians attribute sinister motives to the savers. Keynesians are inclined to blame savers for changes in identities.
Let us walk through some accounting identities involving saving.
1. National saving = trade surplus
This, like all accounting identities, is true always, by definition. It is true whether or not saving is a good thing. It is true whether the economy is strong or weak.
The principle of blaming the savers would tell you that countries running trade surpluses have sinister motives. Hence, Paul Krugman’s view of China and Germany.
Next, take the trade surplus as given. For any given level of national saving, we have:
2. Net private saving = government deficit
Net private saving is private saving minus private investment. The principle of blaming the savers would tell you that the private sector is behaving badly when its saving is high. The government only needs to run a deficit because the private sector is being stingy with spending.
Next, take both the trade surplus and the government deficit as given. For any given level of net private saving, we have:
3. Net corporate saving = net household investment
Net corporate saving is retained earnings minus corporate investment. Net household investment is purchases of houses and consumer durables minus household saving. Once again, the principle of blaming the savers would tell you that when net corporate saving rises, it is because corporations have sinister motives. Hence, Smith and Parentau write,
The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings.
The thesis that savers are driving these identities could be correct. However, one might tell the story differently. That is, one could choose to blame the spenders. It could be that the U.S. trade deficit is caused by the lack of U.S. national saving, rather than excessive saving by China and Germany. It could be that the high government deficit causes savings to rise elsewhere (including in China and Germany, as well as private sector saving in the United States). It could be that massive spending by households during the housing bubble caused savings elsewhere to rise (including in China and Germany, as well as the corporate sector in the United States). Then when massive spending by government kicked in during the last two years, savings elsewhere had to rise, including the corporate sector.
I do not like these latter interpretations any better. In general, I think it is really bad economics to tell stories about accounting identities that blame one side of the identity or the other. Instead, economists should trace movements in saving and investment back to exogenous factors that affect relative prices, including risk premiums. Unfortunately, when it comes to looking at savings identities, a sort of Gresham’s Law seems to apply in the media. Bad economics drives out good.