The article mentions this a bit
They imply it could have something to do with new technologies coming down the pike that need capital investment
Maybe investors feel radical technology changes are coming soon and want companies to hoard cash to invest in the coming next generation of technology. I don’t know.
I want to start this by saying that I’m not out to quibble definitions just because.
It’s just that these national accounts – the NIPAs in the US and the SNA system in many other countries – have technical definitions for a reason. We’re trying to be precise about what we’re talking about.
But that doesn’t mean this is the only right way to discuss these issues. It’s not “wrong” to speak differently. So when I make clarifications about language, I’m not trying to make corrections. It’s not that an economist’s language is correct, and accountants and financiers are wrong. I’m just trying to be precise with what I’m talking about.
I wouldn’t quite phrase it this way.
Savings isn’t “used” to invest.
Saving quite literally is investment (or at least: saving is quite literally production that is not consumed). And not just in “technology”, but literally any production that isn’t meant to be used up right as it’s created. A newly built house is new capital equipment. Building a new house is investment, because it’s production that is not immediately consumed. That is what “saving” is. A pool of money doesn’t count. If we do not invest in capital equipment – if we do not actually build it – then we are literally not saving.
You seem to be looking at a pool of money, calling it “capital” like the financiers and accountants do, and thinking that pool of money is saving. In a macroeconomic sense, it is not saving. It’s just a pool of money. It doesn’t become saving unless someone uses it to produce capital equipment. (Or in an open economy, if someone sells domestic production overseas in exchange for paper assets from overseas, that can be saving also. The core of the definition is that it’s production that isn’t consumed. But on the macro-est of macro levels, it’s exclusively construction of capital goods. The net flow of paper necessarily cancels out.)
In this context: Capital is stuff, not money.
We produce more stuff tomorrow with the help of stuff that we make today. The stuff that helps us make stuff is capital, which exists because of saving. Building this stuff that helps us make stuff is literally what saving is. Not the pool of money.
A pool of money. Not “capital” in the econo-technical sense I’ve been using here, which is stuff that helps us make more stuff. When we create more capital, then that is saving.
But you can then rightfully ask, “Why is it idle? Why aren’t people using the pool of money to build capital equipment, and therefore create saving?”
And I can turn that question right back around: Why did the Golden Gate Bridge take four years to build and the old Bay Bridge three years in the 1930s, and then the reconstructed East Span of the Bay Bridge 11 years at a 2500% cost overrun? There’s something absolutely essential to understand here: our technology is better today than it used to be. We could, absolutely, build things faster than we used to build them. But we don’t. The Empire State Building took just over a year to build, the new One World Trade Center took seven. Here’s some time lapses of some Chinese construction projects, just for reference: a highrise in 30 days, 57-stories in 19 days, a train station built overnight. There is a reason Chinese gross saving is near 50%, with the US rate under 20%. I realize that not all Chinese investment projects were good ideas, nor the political system that can crush all opposition, but if you can build a high-rise in under a month, it’s easier to save, because building a high-rise is saving.
How much does it cost New York City to build a mile of underground rail? In the US generally? How do those costs compare with international figures? How much housing would we have in the highest cost cities if NIMBYs weren’t so successful in crushing new construction to prop up their home values at the expense of younger renters? A great deal of government policy in the US is a direct transfer from the relatively poor young to the relatively richer old. The people who are most likely to save lose some of their purchasing power, given to people who (on average) have more and are more likely to consume.
This is a big problem, with a lot of facets. None of this is directly about “corporations hoarding” a ton of cash. A ton of cash isn’t saving. But it can be used to finance saving, which is to say, people can use that cash to build capital goods.
But there’s just no point in planting a hundred seeds in the ground if you expect the resulting harvest to be ninety seeds, especially because you have to burn seventy seeds waiting ten years for the project to start. That’s not a good investment, not for government investment like rail lines and not for private investment either. And so there will be less saving (less capital investment) in such cases. A lot of these types of discussions end up with a partisan divide between “more regulation” and “less regulation”, and I don’t particularly see the point of that divide. I think a much more interesting approach is “better regulation” or “worse regulation”.
But that particular question gets us beyond the scope of this thread. Also, it’s hard.
Bubbles can happen.
They can be damaging when they burst.
But I don’t think you can really build a policy out of successfully identifying bubbles. (Longish post of mine from earlier.) I’d prefer a policy that can deal with them even if we can’t necessarily identify them. That’s also a hard topic.
Optimal capital taxation is not an easy topic. (There seems to be a pattern here…)
But my own worry about taxing big pools of money is that, long term, we’d be pushing down the savings rate even more. Big pools of money accumulate from attempted saving, even if it’s not yet macroeconomically successful. Taxing that in the wrong way would likely encourage more spending, and therefore more production, geared toward the present (consumption) rather than production geared toward the future (capital investment). Could easily push the savings rate down.
I think the US can increase its savings rate, if we wanted to. And I think the US should try to do this.
But again, not a sexy topic. I don’t think we’ll try. We have other things to think about right now anyway, but even afterward, I don’t think we’ll try.
Excellent as always, but I just want to make sure I’ve parsed this correctly. Please make corrections:
The building time and the savings rate are different issues, yet they are connected. China is able to build a highrise in a month, but it takes the United States years to do it. You are saying that regulations, NIMBY or otherwise, have caused a good deal of the problem. However, for the purposes of this thread, you are not taking a position on the propriety of those regulations and whether they have other benefits.
But, such delays in construction hurt our savings rates because, for example, a company may build a new building if they see the results next month, but do not want to tie up their capital in something that will take years to develop, if the NIMBY types let them develop it at all. China sees the immediate benefit, so higher savings. Us not so much.
Is that somewhat right?
Yes. Money is potentially unlimited. Productivity can continue to increase. So saving money doesn’t necessarily cause a shortage of fluid currency. You can make more of it proportional to the growth in supply of goods.
…which creates a problem for capitalist investors and for the political system: we have flat wages on the one hand and yet the need for economic perpetual growth on the other hand. Ideally that growth is greater than 2 percent and if it’s significantly more than that, we’re close to full employment, which is how we get a a very, very modest increase in wages in the lower and middle income brackets of the economy. Often, the solution to this problem is the creation of more debt.
Thus, the economic system we now have in the US and the growth that we cheer about is not growth based on our actual spending power but simply a product of money supply throughout the economy. In many cases, household spending power is just concentrating wealth into the hands of fewer and fewer investors, which is why I have said that we have a fake economy and fake economic growth. Yes Johnny and Jane can afford a car with their new jobs but chances are, that’s only through the expansion of credit (borrowing against the future).
What we’re seeing now in ways we did not before is the nature of our economy, and what a house of cards it all is. On one hand, we have a very impressive just-in-time efficiency juggernaut. We’ve mastered the efficiency of capital exchange - we can move trillions of dollars through the economy with breathtaking speed. We have also made production and distribution amazingly efficient. Our economic growth, our business expansion, our hiring, our growth in wages are a result of technological and institutional innovations, but we’ve also created a society that has become highly dependent on these complex economic chains and ecosystems. When they function as intended, they produce a livable wage for many and extreme wealth for some. But throw a wrench into the system or do anything that causes even a few weeks of disruption, and all hell breaks loose.
People will reflexively point to the fact that this is a Black Swan event that we’re living through now. Indeed it is, and it’s true that our economic carnage is inextricably tied to the health crisis. But our healthcare crisis is also a symptom of the economic system we’ve created. Hospital and public health policy, planning, and preparedness have either become radically capitalized or bureaucratized in such a way that they serve the interests of preserving a capitalized healthcare.
We’d be better off having better wages and more household savings (which I believe you point out). We’d also be better off if people at the top were not as wealthy as they are now, and bring them back closer to the center of our collective gravity. In other words, we need a better taxation and redistribution system, with redistribution focused on utilizing underemployed and undercapitalized people participating in the development of infrastructure that everyone can use and benefit from. A WPA program can’t be just created on fiat either; it must be funded by the wealthy or we’re just kicking a can down the road and forever diluting our currencies to fund grand monuments, coliseums, and pantheons.
Money is unlimited in theory, but consumer confidence is not.
You are correct. That’s why it’s important to keep money supply roughly equivalent to the supply of economic outputs such as goods and services. Unfortunately, on a fundamental level, voters and so-called leaders focus far too much on finance instead of economics.
The biggest problem for humanity in the 21st century is how to manage an decreasing economy instead of a growing one. All economic theory is based on an expanding economy. But, in the 21st century, the human race has reached a point where its size and impact on the planet must be reduced, not expanded. We are obviously overheating the planet, eliminating diversity of species, eliminating wildlands. In order to maintain a diversity of life on the planet, we must reduce the impact humans are making, which means reducing the human economy.
This will happen. The big question is how society will handle it. A successful one will learn how to manage with decreasing output, not how to promote an increasing one.
Call me a cornucopian, but it seems like advances in 3D printing, nanotechnology, lab grown meat, space mining, etc. will eventually open up new economic opportunities for us.
We’ve never really had to worry too much about natural resource shortages or pollution. But I think we will find ways to build an economic system that takes them in mind.