Economics filter: Can someone explain this article to me? How are capital accumulation, national savings, and consumption related?

March 11, 2008 9:51 AM

Economics filter: Can someone explain this article to me? How are capital accumulation, national savings, and consumption related?

I know this is from 3 years ago, but I still want to understand! In the article, http://money.cnn.com/2005/02/25/news/economy/savings_rate/index.htm, Roger Ferguson said, "If households, on net, take steps to return the saving rate closer to the middle of that range, which, I might add, would provide welcome support to capital accumulation, then a sustained period in which consumption grows more slowly than income would result." What? I don't understand. What does he mean?

And also, when Tom Schlesinger says "Obviously consumption would take a hit if people save at the historic rate," does he just mean that Consumption is the inverse of Savings? I mean, besides in a whatever we don't consume we save way, what is he talking about? Are they disagreeing or what?

posted by idledebonair to work & money (5 comments total)

He bascially says "You can't have the cake AND eat it too"
Americans don't save enough. I they start saving (one day they might have to) then they have to cut spending. Somehow obvious.
I am not sure that consumption is the inverse of savings from an absolute (not relative) perspective. You could imagine tremendous growth in income and productivity that would allow you to consume more and save more.
posted by yoyo_nyc at 10:12 AM on March 11, 2008

The language may be opaque, but it actually makes sense. The article is pointing out that Americans are spending all their income - they're not saving for their kids' education or retirement. Historically, Americans have saved a lot more than 1% of their income. Ferguson is saying:

"If households, on average, started saving more of their income, so that the amount they saved was more in line with historical averages, say, 4 or 5% of income devoted to savings, a few things would happen. First, it would provide welcome support to capital accumulation. This means that people would begin investing their money in the stock market, which would in turn inject a significant amount of money in American companies, allowing them to build up funds which they can invest in new equipment and factories. This would be welcome, since companies have had a hard time raising capital because people are devoting all their money to consumption, rather than savings. If people do this, you will see a sustained period in which consumption grows more slowly than income, because while people's income would be going up by, say, 3% a year, they would only be spending half of that, so consumption would only go up 1.5%"

Schlesinger is saying that when people put their money into savings, they don't put it into consumption. Two thousand you save is two thousand you don't spend on a new TV. Yes, consumption is the alternative to savings. You do one or the other. They are not disagreeing. He's not saying anything other than what you understand.
posted by Dasein at 10:22 AM on March 11, 2008

Ferguson and Schlesinger are almost certainly referring to the National Economic Accounts data from the BEA. The BEA is not directly measuring "savings" (as commonly understood) per se. Rather, they're more concerned about measuring the flow of money -- income and expenditures -- with savings defined as the difference between income and expenditures. So, in order to increase savings, you can either increase income and/or reduce expenditures. The idea is that the most likely avenue to increasing household savings (in the short run, at least) is to reduce expenditures (i.e.: personal consumption) while keeping income constant.

Way more than you needed to know about this data can be found here.
posted by mhum at 10:25 AM on March 11, 2008

@Dasein: But if people are consuming a real lot, doesn't that mean that the companies are getting the money anyway? Wouldn't the funds be available to them because people are buying their goods and services, as opposed to investing in the stock market? Doesn't it seem like saving hurts the GDP? What if people don't invest with their savings, but keep it in cash?
posted by idledebonair at 10:41 AM on March 11, 2008

Companies don't necessarily make enough profit to fund capital purchases. Companies use offerings of debt or equity to raise capital. So they rely on investors for this. When the money is put into stocks or debt, all of it goes to the company for capital (assuming you're buying stock from the company, and not just from another stockholder). When you buy a product, only a small percentage of that actually makes it back to the company as profit. Also, companies that are publicly traded would not make their stockholders happy if they reinvested all their profits in capital instead of paying out dividends.

Yes, saving can hurt the GDP. That's why Bush wanted everyone to spend like crazy after 9/11, to avert a recession. But without savings, you run into other problems - an insufficient pool of capital; the government has to look abroad to get people to buy its debt so China ends up owning US government debt instead of Americans; and people end up having to work their whole lives because they don't have any retirement savings.

Only idiots keep their savings in cash. If it's not earning interest, you're just losing money to inflation year after year. Your bank accounts are insured by the government; the wad of bills under your mattress is not.
posted by Dasein at 11:13 AM on March 11, 2008