Economies Aren't Living, Breathing Blobs, They're People

Here’s another brief, but rather rhetorical question for readers: Are you better off when you save more of what you earn? The answer to this question is so obvious as to beg the question why anyone halfway bright would ask it. 

Still, it’s worth asking simply because Greg Ip, the Wall Street Journal’s chief economics reporter, believes abundant savings in Germany and China are economically harmful, and that they’ll lead to “dangerous imbalance” that will leave “others, including the U.S. and the rest of Europe, worse off.” Ip must mean well, but here he's rather misguided.  

Plainly missed by Ip is the basic truth that country economies aren’t living, breathing blobs; rather they’re just collections of individuals.  And as individuals, parsimonious Germans and Chinese are much better off than the prodigals in their midst.  As are we all.  Savings are what free individuals from reliance on others when times get difficult, plus they’re the only path – short of inheritance, or winning the lottery – to abundant wealth.  Those who save early and often have the potential to compound what they don’t consume into impressive wealth.

Yet according to Ip, the same thrift that invariably elevates the individual creates “dangerous imbalance” for the rest of the world.  More on what Ip can't possibly believe in a bit, but for now it’s useful to consider what individual saving means for the broad economy overall.  According to Ip, “A trade surplus means a country consumes less than it produces and thus saves a lot.” He believes that a “lot” of saving is somehow harmful to the global economy, but no serious person would argue that less capital is preferable to more of it.  Indeed, absent savings there would be no entrepreneurs, no growing companies, and no jobs.  And it's a tautology that entrepreneurs cannot be just that absent the prudence of others.  Neither can companies grow, nor can they hire or pay higher wages.  That the Germans and Chinese save a lot, far from causing “dangerous imbalance,” is crucial to economic progress.  For all but the CEOs of the most blue-chip of businesses, running one is defined by a near constant search for the capital necessary to stay afloat. Savers, to paraphrase Adam Smith, are society’s ultimate benefactors.

To Ip, aggressive saving is harmful because his mistaken application of Keynesianism has him believing that the act of saving equals a lack of spending.  He's also convinced that an abundance of capital is the stuff of crises.  But first up it's worth addressing the idea that saving subtracts from spending.  Glossed over by the Capital Account columnist is that no act of saving ever shrinks demand.  Unless savers are literally stuffing their unconsumed dollars in coffee cans, they’re likely placing their excess in a bank.  If so, what individuals save is immediately lent to those who have near-term consumptive desires.  Figure that financial institutions don’t pay for deposits just to stare at the money.  If banks did sit on savings they would be instantaneously insolvent, which is why they don’t.  Banks pay a rate of interest for deposits (liabilities), then immediately loan the money borrowed from savers; the loans amounting to “assets” on the books of banks.

Of essential importance is another truth skipped by Ip: all demand springs from production first.  If anyone doubts this they might consider how long they would be able to survive if they spent every day buying things rather than working.  Absent the support of benevolent souls eager to fund their prodigality, consumers would soon perish thanks to a lack of food, clothing, and shelter.  We’re only able to consume insofar as we produce first.  This speaks to yet another crucial aspect of abundant savings: they boost our productivity.  Stating what is once again obvious, absent savers we’d all be living in caves.  But thanks to savings entrepreneurs and businesses have been able to access precious resources that have led to the computer, automobile, airplane, wi-fi and all manner of other productivity enhancers.  Before all of them we basically worked so that we could eat, but thanks to greatly enhanced productivity wrought by savings, we’re able to demand a great deal more precisely because we produce a great deal more.  The savings Ip decries are the source of staggering global abundance.

To Ip, all of the above is seemingly not so.  He presumes what is impossible, that a country can consume less than it produces.  Ok, but countries don’t consume as is; rather individuals do.  And their production and consumption balance, by definition. 

That’s true simply because production is once again the source of all consumption.  When we produce we’re demanding things, but some individuals logically choose to save, thus shifting their consumption to others with near-term wants; or shift savings to entrepreneurs in need of capital goods that savings can be exchanged for to fund their expansion.  There’s quite simply no such thing as consuming less than one produces simply because production is always and everywhere an expression of want.  That some will delay the consumption - or pass their consumptive ability on to future generations - doesn’t change the latter one iota.

In Ip’s defense, his mis-analysis springs from the economists who hijacked his June 1 Wall Street Journal column on trade and savings.  Former Bank of England Governor Mervyn King was Ip’s most prominent source, and that was the problem.  Indeed, in his scarily obtuse 2016 book, The End of Alchemy, King asserted without even a hint of irony that what happened back in 2008 was an effect of the end of communism that freed millions from collectivism and murder. To King, their subsequent productivity led to abundant savings that somehow caused a “financial crisis.”  King amazingly believes that the precious savings CEOs spend every day in search of are economically harmful, and he’s found someone with an impressive perch in Ip generous enough to spread an economic falsehood not even taken seriously by the ignorant.  Ip deserved better from King, to say the least. That the former central banker saddled him with the ludicrous notion that precious capital is economically perilous was and is wholly unfair. 

Ip concludes that President Trump “gets a lot wrong about trade.” He’s right.  The problem is that Ip's informer in Mervyn King may know even less than Trump does, and that's truly saying something.