Good point. I can't fathom this tendency to talk about capital formation in the abstract without mentioning the idiotic ends to which this capital is typically applied.
Carl Remick -----Original Message----- From: Michael Brun [mailto:brun at uiuc.edu] Sent: Thursday, August 06, 1998 1:11 PM To: lbo-talk at lists.panix.com Subject: Re: Jonesing for the Dow/Savings Rate
Liberals like to say there's an investment deficit; I do believe that EPI has devoted no small amount of paper to making that argument. But since, as Keynes said, investment and saving are merely alternative names for the difference between income and consumption, then how can you say the investment rate is too low but that savings are irrelevant?
Is the issue here investment or investment opportunities? I thought the Savings and Loan crisis and other recent bubbles pointed to an excess of investment, not a deficit, and by the above syllogism to an excess of saving as well. Excess saving/investment is money for which no income-earning opportunities (at least no reasonable, non-fraudulent ones) are available.
Also, saving is the same thing as lending, and, just as saving equals investment is an identity, so is lending equals borrowing. In some aggregate sense--and we can't be satisfied with aggregating over the nation anymore, we have to aggregate over the world, and there we don't have much good data--the savings rate must be zero if you count borrowing as dis-saving. So to speak of a savings rate makes sense only from the perspective of a census of household behavior, not as a macroeconomic variable.
In country A, households lend and corporations borrow; in country B corporations lend and households borrow. A will show a positive savings rate, B even a negative one. Yet both are pausible situations. A is the familiar story. B is where most households have declined to sharecropper status, and have to borrow from corporate profits to make it. It's not nice, but a fairly stable arrangement. However, if too many households go bankrupt from overborrowing (=overlending by the Scrooges) there'll be a Savings and Loan style crisis. That's resolved one way with the liberal bankruptcy laws we have now; in the old days that may return it's resolved through debt peonage. There are more roads to serfdom than Hayek thought.
Even if we restrict our attention to households, and forget about corporate saving, there would still be the problem of documenting saving behavior of very wealthy households. This problem becomes more serious as income and wealth inequalities increase. So the savings rate as usually presented is of limited use for macroeconomic analysis, because it doesn't tell us about the size of credit or investment expediture flows. It remains of some interest because it does give us hints as to who is participating in those flows and how.
Michael Brun