After watching scary British crime dramas, my wife and I often turn to a rerun of The Big Bang Theory for comic relief. I find myself laughing almost as hard the 10th time I see an episode as I did the first time.
Last night, though, one comment of Penny’s stood out and it bugs me every time I hear it. She learns that even though she is the high earner in her marriage, her husband Leonard has squirreled away over $6,000 in a secret bank account. She’s upset.
I get that she’s upset. Trust and openness in a marriage are important. But here’s what I don’t get, or, rather, I get and disapprove of. She castigates Leonard because he’s not using the money for anything.
There are two possible meanings of “not using the money for anything.” The charitable interpretation is that he’s not investing it in something like the Vanguard Total Market Index. Even though the characters in Big Bang are getting old, they’re still not quite 40, so my advice would be to go all stock index.
But who thinks that’s what “I love these new shoes” Penny is thinking. The odds are over 90% that she meant Leonard is not spending the money whereas he or she could spend it.
Why does it bug me? Because I occasionally run into smart people who don’t understand the basics of saving and compound interest. They don’t get that by saving 10 to 15% of their gross income every year for 30 years or so, they can be, by their standards, fabulously wealthy.
In 1999, economists Dwight Lee and Richard McKenzie published Getting Rich in America: 8 Simple Rules for Building a Fortune and a Satisfying Life. In my review in the Wall Street Journal I called the book a “how to guide for becoming the millionaire next door.” The authors give 7 rules for becoming rich in America. (Their 8th rule is about balance.) Rule #3 is “Resist temptation.” Penny doesn’t do that. That upsets me to some degree. But what really gets me is her moral outrage at someone who does resist temptation and plans for old age.
READER COMMENTS
Jon Murphy
Sep 4 2019 at 6:03pm
Good stuff. In a broader context, I see that argument all the time. It’s used to justify all kinds of redistribution schemes or stimulus plans (“idle” capital isn’t being used). But resources are always and everywhere scarce. If Leanord’s $6k is used on, say, shoes, it cannot be used as a future down payment on an apartment. Or, if it is spent, the bank cannot loan it out to someone to start a new business.
Saved (or what is incorrectly called “idle” in many econ classes and books) resources are not unproductive. They are not “doing nothing.”
Phil H
Sep 5 2019 at 3:08am
I think you’re confusing two separate arguments. One is about whether it is possible for resources to be idle. Clearly they can: fields can go unploughed, cars can go undriven, able-bodied people can not work, money can go unspent. Unspent (and uninvested) money is indeed idle. You’d be right to say that there is an opportunity cost associated with every spending/investment event… but that’s built into the cost of the transaction.
The other argument is, is it good to save? For most people (in developed nations) it would perhaps be better to save a bit more. But that doesn’t mean the concept of idle resources is wrong!
Jon Murphy
Sep 5 2019 at 7:17am
I disagree. I’m not confusing the concepts. I’m arguing it’s a distinction without a difference, as evidenced by the opportunity cost.
Warren Platts
Sep 8 2019 at 11:46am
If everything is literally scarce, then the very word ‘scarce’ loses all meaning. Scarcity is a relative concept, like warmth or coolness. The stock of cash available in USA to be invested into productive, greenfield businesses and expansion of existing businesses relative such productive investment opportunities is abundant. What is scarce are the productive investment opportunities themselves, relative to the pile of cash available to fund such opportunities.
Thus, economically, Penny has a good point. If every household in the nation followed Mr. Henderson’s advice and decreased their consumption by 15%, the percentage of GDP spent on consumption C would be reduced from 70% to 60%. Yes, “investment” I would increase by a comparable amount, but it would mostly take the form of mostly useless stock buybacks, rather than purchases of new machines. In reality, purchases of new machines would DECLINE due to the decline of aggregate demand.
If anything, the United States, as an economy, needs to save LESS.
Jon Murphy
Sep 9 2019 at 7:36am
These two things contradict each other. Is scarcity meaningless or relative? If it is meaningless, then it cannot be relative (and vice versa). It is true, as in your second sentence, that things have different costs. But that just goes to prove that scarcity is a characteristic to all things.
Which would, by definition, make the US trade deficit worse as more foreign savings come in to satisfy demand for investment in the US economy and Americans spend more on imports.
Jon Murphy
Sep 9 2019 at 9:26am
This is factually incorrect. Remember: Investment in GDP is not things like buying stock and bonds. It is business consumption. Buying stock and bonds (or increase value thereof) may lead to an increase in Investment now that the firm has more money to purchase equipment, buildings, and other goods and services, but the purchase of stocks or bonds do not in and of themselves factor into Investment.
Jon Murphy
Sep 5 2019 at 5:11pm
Perhaps an example will be helpful here:
Resources are scarce. This means that, at the very least, there is a choice between the resource being “idle” or “unspent” or “leisure” or “saved” or however you want to call it and immediately consumed. The idea of leaving a resource idle is that, at current opportunities, the benefit of employing said resource is less than the cost of not employing it. Thus, one expects greater opportunities down the line.
If so-called “idle” resources are forced into the present from the future, say a stimulus bill to employ unemployed workers, then you are pulling resources away from those anticipated future uses and into current uses.
So, “idle” resources are not “unspent.” They are not “unproductive.” They are being saved for future consumption.
Thaomas
Sep 5 2019 at 8:10pm
Fields, machines and labor can be idle (e.g. in a recession), but “money” cannot be. Even if Leonard puts dollar bills under the mattress, that does not affect the Fed’s monetary policy that keeps all resources as fully employed as it decides to keep them.
Phil H
Sep 5 2019 at 8:47pm
Thanks for both those replies.
Jon: “So, “idle” resources are not “unspent.” They are not “unproductive.” They are being saved for future consumption.”
Yes, I take the point, that from an aggregate or backward-looking perspective, you can treat idle resources as being saved. From that perspective, the intentions of the saver/leaver idler are not relevant, and can be ignored. But from a micro, forward looking perspective – which is where all of us live! – there is clearly a three-fold distinction to be made: resources that are in use now; resources that are being saved for a specific purpose (the 20,000 in my account that will soon be a down-payment on a house); and resources that are not currently being used, with no conscious plan.
From the original post, when P said is “not using the money for anything,” L could have refuted her by saying, “I’m saving up for a new car.” Anyone would recognise that as an effective refutation. But it still does not involve the money being instantly “used”. What this demonstrates is that the concept of “not using” or “idleness” involves *intentions* as well as the actual status of the resource/money.
If you want to argue that on an aggregate level, there is no distinction between money that is simply unspent (and later used for purpose X) and money that is consciously saved for purpose X, then I’d agree. But clearly on the individual level, those two behaviours are not the same. And this is the distinction that the word “idle” (often) captures in day-to-day discourse.
Clearly there are a whole bunch of assumptions built into a concept like that, e.g. the assumption that planned use of resources is better than unplanned use.
Thaomas: I think the same response applies to what you said. Money can be idle if no one is using it. You can argue that on aggregate (the Fed policy perspective), there is no difference between conscious saving and accidental non-use; but there is a difference on the micro-level. And one of the things that Henderson is arguing for is more conscious, active saving. So I think this distinction should not be ignored lightly!
Jon Murphy
Sep 6 2019 at 8:19am
Intentions don’t really matter here, but if you want to say they do, that doesn’t weaken my case. If I remove my capital from current consumption, my intention is “something better will come along and I want it ready then.” The $13k currently in my savings account doesn’t magically stop being savings because I have no intention to spend it on something specific in the future
Warren Platts
Sep 5 2019 at 1:46pm
There is already a mandatory savings program: social security and medicare. The combined rate is 15.3%; so I guess the author is suggesting we really need to save 30% of our income!
David Henderson
Sep 5 2019 at 2:06pm
Actually, it’s not a savings program. It’s a tax-and-benefit program. There is only a loose connection between the amount taxed and the amount received back. This is especially true for Medicare.
Thaomas
Sep 5 2019 at 8:14pm
Yes, and financed with a poor choice of taxes (on wages up to a cap) rather than with a progressive consumption tax or even a flat consumption tax like a VAT.
Thaomas
Sep 5 2019 at 8:55pm
Fabulously wealthy?
In an example I worked out, if savings earn a return, 2%, equal to the rate of increase in wages over a working lifetime (20-67) and 15% of income is saved in an account deferred from progressive taxation (ATR rising from 7 to 22%) and savings are drawn down uniformly over an average retirement period (68-85). retirement disposable income after tax is less than starting disposable income after tax — a “replacement ratio” of about 50%. And that’s with no periods of unemployment, no variation in rate of return on savings or rate of increase in income, and no uncertainty by constriction about outliving income. It takes a 24% saving rate to get to something like an 85% “replacement ratio.”
David Henderson
Sep 5 2019 at 10:19pm
Your 2% rate of return is way too low.
Bill
Sep 7 2019 at 10:52am
Saving and hoarding must be distinguished. Henry Hazlitt’s chapter, “The Assault on Saving,” in his delightful ECONOMICS IN ONE LESSON, is instructive on this topic. Relatedly, it’s not uncommon to encounter the view that transfer of income to lower income folks is stimulative since these folks exhibit a higher marginal propensity to consume.
Warren Platts
Sep 8 2019 at 3:45pm
Agreed. So let’s be clear. A business, by definition, saves all of its income, that it then invests. So if a business invests all of its income in stock buybacks, that counts as hoarding. Right?
Jon Murphy
Sep 9 2019 at 7:14am
No. That is not hoarding. That money comes from somewhere and goes somewhere. It doesn’t just disappear.
Jon Murphy
Sep 9 2019 at 7:39am
I actually think that’s one area where Hazlitt is weak. The distinction between hoarding and savings that he makes is common but unconvincing; it relies on an objective understanding of “productive action” rather than a correctly-understood subjective one (which is to say, productive in that it is seeking some desired end).
Further, his discussion on holding back purchases during a recession, he is incorrect, I argue, to say such an action is not a form of savings. If one thinks resources will become cheaper in the future than they are now, it is a form of savings to hold back consumption now for future purchases.
David Seltzer
Sep 9 2019 at 7:26pm
Interesting. My nephew Mason, an aspiring economist, just went off to college as a an incoming freshperson. Sorry. I couldn’t resist. He wants to be wealthy, and asked me about annuities. He saves $200 monthly. I explained, if he bought the S&P 500 ETF monthly and held it until he was 65, he would have accumulated $1,156,520 at a market rate of 8%. He quickly calculated what his projected wealth would be if he averaged $500 per month over that time horizon. He was amazed. BTW. Re the BBT, Chuck Lorrie is something of a comedic genius. If you like his writing, watch Two and a Half Men. Brilliant stuff.
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