The Paradox of Saving

Posted by Milos Sugovic

For years we were told that if consumers don’t save more it will destroy the economy. Now we’re told that if consumers do save more it will destroy the economy.  Are economists bad at communicating or just plain old stupid? 

They’ve advocated again and again for an increase in the savings rate, and now they have it. So shouldn’t they be delighted that consumers are finally, after all that happened on Wall Street, saving more? Turns out, they’re not--and rightfully so.

In layman’s terms, GDP is comprised of consumption, investment, government spending, and net exports. It’s the aggregate income of all of us and there’s an important caveat in its components: investment is a function of saving. So lower consumption (higher saving) means more capital investments, assuming all else being equal, which translates into higher productivity, more jobs, more output, more income, and more consumption. So saving today generates consumption tomorrow: it’s a long term goal.