I’d go a smidgen further.
The terms “appreciation” and “depreciation” when applied to things like exchange rates or financial instrument valuations, have just about zero to do with the term “depreciation” as applied to the declining practical and hence economic value of assets through time and use.
Same word, very different meaning. If psik can’t tell those two apart, we’re back at needing to take English 101 before we can take Econ 101.
(Shouts from passing high-speed train)
I think this discussion gets lost in its own navel when it devolves to arguing economic theories. The real answer, to me, lies in looking at the broader picture: are we, as a nation and a globe, locked into a model of maximized consumption driving maximized production*, or not? I think the answer to that falls under the “Duh!” heading. Disagree? Apply your elaborate economic theorizing to what would happen if every income-earner in the US decided, on April Fool’s Day, to start saving 10% of their income instead of spending it. Most analyses I’ve seen, under varying theories, add up to “Doom!” Dooooom!" The system cannot stand any reduction in production/spending/consumption… Q.E.D.
(Train dopplers off into the distance, leaving silence.)
*and continually rising as production and other economic forces allow.
The tools and stuffs we currently use to produce things are geared in a certain way.
Any attempt to suddenly “save” 10% more overnight would obviously create a massive shock to the economy. Macroeconomically, “saving” means the production of investment goods rather than consumption goods (basically). But we’re not geared for such a sudden shift in our productive capacity. All the machines we’ve created for the direct creation of consumption goods would go idle, since 10% of them can’t be repurposed overnight for the creation of investment goods instead. But the same is true of any other 10% shift in any direction. A sudden attempt to save 10% less, while consuming more, would be similarly painful.
Consumption production is about 68% of total production. We simply don’t have the tools or equipment to suddenly increase that to up to 75% of total production overnight (assuming a similar level of total production). Our current equipment simply isn’t designed for that. The tools currently designed for the creation of investment goods can’t suddenly be repurposed for more massages and Big Macs. We can’t suddenly use an excavator to provide more personal backyard landscaping services. A factory that creates parts for surface strip mining won’t start producing smartphones overnight. And so on and so on and so on.
But the problem can be even worse than that.
Any sudden increase in consumption necessarily means that less of our productive capacity will be devoted to maintaining the machines that provide us all of that consumption. If you eat all of your seeds, then you have nothing left to plant so that you will have more seeds tomorrow. So do we have a consumption-based economy? Or an investment-based economy? The answer, of course, is both. This is always the problem with “Duh!” theories of anything. The only reason why a complex system ever seems simple is that the underlying weirdities haven’t been properly thought through.
We could increase saving as a percentage of GDP. We probably should increase saving as a percentage of GDP. We could starting planting more of our seeds instead of eating them. Not overnight, but gradually. We’d want to do it slowly to give our system the time to adjust, but this is true regardless of which direction we wanted to move.
I’m curious about what it would mean for the overall economy if Americans increased their savings rate slowly, say over a generation.
Consumer spending does stimulate the economy
Yet it’s not clear to me that any rate of household savings is a determiner of an economy’s strength. This chart from the OECD shows a wide spread. Japan has much lower savings and most reports say that its stagnant economy hasn’t been helped by spending. Yet Denmark and New Zealand have even lower rates and I don’t believe they are stagnant. China is not on that chart, yet other cites say it has very high savings because there is no social safety net and retirement system. Government spending has been driving its boom and with that declining the economy is suffering.
Nor do I see that savings correlates with the overall U.S. economy over time, except for a few spikes. This chart goes back to 1960 and shows a generally downward trend in the rate, though it’s actually risen over the last decade.
If there is no correlation of savings with the strength of the economy, what is the reason for advocating more savings or a switch away from certain purchases? Is it purely a moral issue?
Long-term growth.
Not a business cycle issue. Not about stimulus. Really, most recessions in the developed world are probably driven by the sudden attempt of the whole population to save at once. An attempt which must inevitably fail because economies can’t just readjust like that. Sudden shifts like that are bad.
But long-term growth is different. This isn’t something that’s going to speak from an individual country’s time series data. It’s far too slow of an effect. There’s no super-duper growth formula where, for example, cutting a certain tax bracket today magically pays for itself in government revenues next year. The issue is that very tiny improvements in growth compound over the decades. The difference between a US or an Argentinian standard of living at the beginning of the 20th century wasn’t especially large. But small improvements build on themselves over time.
It could be we have enough issues at present, so that savings should be a low priority. Insufficient demand is still a real and pressing concern in many parts of the world because of the ridiculous policy response we’ve seen since 2008. But in my estimation, growth is one of those issues that should always be in the backs of our minds. The entire reason we have our current standard of living, instead of say an Argentinian standard of living, is the sufficiently beneficial choices that were made in the past. (As far as the empirical methods go: there have been hundreds of proposed covariates for growth recommended in the past. There are so many that they outnumber the data points available, which is problematic to say the least. But there’s no doubt that saving is an important component, and there’s likewise no doubt that saving by itself is entirely insufficient.)
How is savings correlated with growth? You appear to be saying that increased savings leads to long-term growth. How long is long term? Are we benefiting now from the larger savings in 1960? Does this mean that America in 2060 will suffer from lower savings? I can see why incremental growth has pushed the U.S. ahead of Argentina. But I don’t understand how the savings rate factors into that growth. And I don’t understand what the range of savings rates among westernized countries today means for the various futures.
A core difference between rich countries and poor countries are machines. Equipment. “Capital.”
Resource-blessed countries can extract valuable stuffs from the ground and sell it for a good price, but that isn’t necessarily going to make the place properly rich for everybody unless they supplement those commodity sales with the construction of domestic equipment that makes it easier to provide the goods and services that they want long-term. In fact, it is believed by some that to be overly blessed with certain natural resources can lead to a development curse because so much of the focus is on the exploitation of a single industry, at the expense of all the other things that a stable and successful country needs.
In a macro sense, “saving” is (mostly) just another way of saying “building equipment”, specifically the sorts of equipment that help us produce more stuff in the future. This is a point that is topsy-turvy to some people. It’s hard to shift thinking from micro to macro. An individual can save by having their income exceed their outgo. But looking at the big picture, we can see that’s impossible, because income equals outgo when everybody is counted. We can’t as a people earn more than we spend, because one person’s spending is another person’s earning. To spend less necessarily means that incomes go down.
We can’t define saving as the difference between income and spending, because those two are the same thing when we zoom out far enough. So we define saving as the difference between income and consumption. One way to illustrate this idea in its simplest form is the seed economy. We spend our time producing seeds. We can do two things with them. We can consume them, or plant them to make more seeds. Saving is planting the seeds instead of eating them. Shifting focus to the real economy: we can say that saving is investment in new physical stuff. Saving is using our productive capacity to help create more productive capacity in the future. In a real economy, this means real equipment.
Rich countries are countries with a lot of equipment per worker. That might be the single most important defining trait of what it means to be “rich”. (PDF textbook link, with useful graph on second page.)
When you see a voluntary flow of workers from one country to another, what you’re almost always looking at is a flow of people from a place where the stock of capital per worker is low to a place where the stock of capital per worker is high. Workers want to be where marginal productivity is high, which is another way of saying that they want to be where the equipment is. These are the places where wages are higher, because the productive power of elbow grease is magnified by the previous seeds that were planted. (Conversely, the owners of the machines want there to be more workers, for the same reason but flipped around.)
Real saving is increasing the stock of capital. This is about more than just the personal saving rate, though that’s obviously a related topic. This is about the whole stock of capital. And yes, it’s absolutely true that the saving of the past, meaning the build-up of the US stock of capital – all those machines and all that equipment that were created to help us make new stuff, the growth of which is a trend that started well before the 1960s and continues until today – is one of the primary reasons why even a minimum wage worker in the United States has an income in the upper quintile of the world distribution. We have more capital per worker, so workers here tend to earn higher wages. Obviously this isn’t the entire story. No story is the entire story. But this is such an important piece of the story that it’s something that can never be neglected by any study of economic growth.
If we want higher productivity per worker, then we need more equipment per worker. Which is another way of saying that we need more saving. Increasing the stock of capital is what saving is. (We need other things, too, but those other things don’t negate the key importance of saving.)
This is, as I said, a long-term process. What we’re not likely to see is any major shift in the stock of capital from a year-by-year change in the personal saving rate. The value of the US stock of capital is estimated at over 40 trillion dollars. This is more than double US GDP, and a good chunk of our annual production is geared toward merely maintaining our capital – fighting depreciation. Only after that is accomplished can we actually increase the stock of capital on net. Point being: any shift in the personal saving rate is only going to have a partial effect on total national saving, and any increase in national saving will be only a small drop in the large bucket that is the total US capital stock.
But there is a clear point of inflection, visible in the previous graph, where the growth of the capital stock naturally slowed from the Great Recession. (Investment spending is much more volatile than consumption spending.) This slow-down of the growth of the US capital stock has not been a good thing. If this trend doesn’t change, people in 2060 will be poorer than they would have been if we had maintained more saving and thus stronger growth in the stock of capital. Of course, internationally we’ve had serious problems with aggregate demand, so this concern with saving is arguably not at the top of the list. There might be many other things we should be considering first. But as I said before, in my estimation growth should be something that’s always in the back of our minds.
I think that answers your questions, but if not, let me know. Basic idea: economic strength relates to the stock of capital (along with about a billion other things). Countries with more equipment tend to be richer countries. More national saving is just another way of saying that we’re creating more equipment. The personal saving rate is one part of national saving. The stock of capital is very, very large, so the effect of more saving to increase that stock of capital is very, very slow. It works more on the order of decades than year-to-year.
An excellent post, but I would like to add that in some models capital/savings/investment isn’t just limited to equipment. It can also extend to human capital, where your population builds up skills/knowledge etc. over time, which can also get reflected in growth.
Yeah, good point. I was trying to make clear in my post that all this saving stuff is a necessary but not a sufficient condition for growth. There’s a lot more going on.
A less important point: the term “Demand Side Depreciation” kind of rubs me the wrong way. I guess it’s clear what it means, but the depreciation of consumer durable goods is still a supply-side matter. Those consumer durables are themselves a kind of capital good. Demand is that I have a personal subjective preference for clean clothes. Supply is that I have a washing machine. I am a capitalist, in that I own this particular capital good. This machine, along with the labor of sorting the clothes and throwing them in, helps me to produce the service of clean clothes for myself. My laundry labor is much less with the help of the capital good than it would be otherwise. I can spend more time on Netflix instead of scrubbing linens.
If I were going to calibrate a macroeconomic model, it’d be proper to use not only the previously cited stock of capital goods. Added to that would be the stock of consumer durable goods as another kind of “capital” (data on various stocks of assets available from the BEA or translated into graph form by the St Louis Fed). The standard NIPA tables don’t do a good job with this. They’re frozen into their current form as a matter of historical habit, a sort of archaic terminology. The purchase of consumer durable goods is considered “consumption” in the tables. It’s not. We don’t buy the washing machine to consume it immediately. We buy it because of the flow of future services that it provides. And hey, that’s actually what “investment” is when you think about it. You have to outwit the NIPA tables, so to speak, in order to get the categories to line up correctly.
I read through the linked textbook chapter quickly. I was struck by the bolded statement on p100. “The more investment a country does, the higher its steady state standard of living.” A chart (Fig 5-18) shows that for Asian countries. High savings rates are touted on p105. The immediate effect of higher savings rates and therefore investment is too low to be noticeable, as you said above. However, a growth in investment rate by 10% would get the country two-thirds of the way to a higher steady state in 40 years. And it says this:
Reverse that for a decrease. Doesn’t that imply that a consistently lower savings rate over 55 years would move the country to a lower steady state? The generation that benefited was the past working generation and those suffering were the ones unborn in 1960 but who are alive now?
That provides the correlation for increasing the savings rate now I was looking for, if I have that correct.
I love people who think that consumerism was invented last year. They had billboards in ancient Rome, name brands by the time of the Civil War and credit cards have been around since the 1920’s.
Precisely.
(Of course in reality savings rates don’t tend to be exogenously fixed at some constant percentage, “TFP” is not some magical thing unrelated to the amount of capital spending, etc etc etc. I could spend all day on wrinkles. But I guess the underlying question here is simply: how do we value the future compared to the present?)
Consumerism is not consuming us, it is driving us.
You go to the store to buy your son some jeans. They’re $32 a pair, and you know little Jimmy is going to grow out of them, probably before you get home.
So, you do what you promised you would never do – you go to Wal-Mart to buy the $7.99 jeans instead. You know why they are so much cheaper? Because Wal-Mart buys them from a shop in a third-world country that pays their workers next to nothing, and because Wal-Mart does not pay their employees a living wage.
Why does Wal-mart use these legal-but-cheap methods to lower their prices? Because you demanded they do so, when you wouldn’t spend the money to buy jeans from a retailer that sold goods made in America and pays their employees enough to live on.
We dug this hole ourselves.
What would the 3rd world worker be doing and what would they be being paid if you didn’t buy those jeans for $7.99 instead of $32 a pair? And why would it be better for us, as a country, to be forcing our citizens to pay a premium for something that they can obviously get cheaper?
Eating cake of course!
/fauxmarieantoinette
Have you noticed that the Nobel Prize in economics is not really a Nobel Prize?
http://www.alternet.org/economy/there-no-nobel-prize-economics
So the 8th grade algebra involving the depreciation of hundreds of millions of cars is not noticed by so called Nobel Prize winners.
ROFLMAO
psik
This isn’t worth the powder to blow it to hell, but for the sake of others who haven’t been following this ridiculous attempt at 8th grade logic I’ll elucidate.
Why did I post that link? Because psikeyhackr said this:
That’s a jaw-dropping statement. I grant that some discussions of economics may go back into history but I would defy piskeyhackr to cite examples in which the place of depreciation in the status of the overall modern economy is discussed solely by reference to Smith and Marx. If anyone were specially named, it would be more recent economists. As the Quota answer I cited said, “Demand side depreciation is very important to economics, especially at a micro level and has been studied extensively in the past 60 years.” Who are some of the major names in economists over the last 60 years? Well, I know where a list is to be found.
Anyone with the slightest passing understanding of economics would know this. Anyone with the slightest passing knowledge of economics also knows that the the Nobel Memorial Prize in Economic Sciences is not one of Alfred Nobel’s original five prizes. You should be able to tell that just by the name. It’s a Memorial Prize. You know, in memory of. You don’t give those out yourself.
Now, we have given the actual role of depreciation several times in this thread. Both micro- and macro-economists study it. They understand it, calculate it, and assign it to all areas in which it is of importance, which pointedly do not overlap any areas to which psikeyhackr assigns it.
It’s remarkably like trying to talk physics with a Truther.
And when depreciation is talked about isn’t it the depreciation of either MONEY or CAPITAL GOODS?
The thread is about CONSUMERISM. Goods that consumers buy which depreciate hugely did not exist when Marx and Smith were creating the founding perspectives of economics.
You can use Google Ngrams to track the use of the word “depreciation”. It goes way back before 1900. But consumers were not losing wealth on the depreciation of cars then. So I am pointing out what modern economists are not saying.
psik
What happened in 1908?
That is when the Model T was introduced. Anything else?
psik
Something totally unknown to someone pontificating about economics, evidently. :smack:
