Assume we have a civilization where workers saved 20% of their net (after tax but before housing, food, transportation, etc) income. What are the pros and cons of this? I don’t know tons about economics, so I really don’t know.
I have heard it will boost R&D, but I don’t know how.
It would make it easier to weather economic problems like the one we are having now.
Would it reduce interest rates? Would it affect the tax rate?
Would it drive down wages? If everyone ‘knew’ that most everyone was saving 20% of their after tax income, would employers cut wage increases?
Would it reduce incentives among suppliers of housing, electronics, medicine, etc. to keep prices low and reduce inflation?
It would hurt the economy since our economy is consumer demand driven. But over a period of a decade or so would the economy change to find new uses for the money other than increased consumer demand?
If we had a savings rate, does that mean some nation would have to be going into debt to counterbalance the savings? If labor creates wealth, but some of that wealth is saved, does that mean other people have to go into debt in order for the system to have equilibrium, or would supply and demand go down globally until people weren’t saving anymore?
I’m along the lines of thinking this thread was created because China has a savings rate of 30% and is doing a good job economically.
For a more Western orientated view, you’ve only have to go back to the end of World War Two to find a comparable situation, and what it lead to was an export driven economy where investment was offshore in markets (Eg Western Europe) rather than in domestic consumer demand, which I think is alot more healthy to a countrys economic progess than what the US is doing currently.
Well, the money doesn’t go into a black hole – I assume it has to be spent eventually. I usually save better than 20% of my paycheck. But then I go and spend it on frivolities like a new roof for the house or an exhaust system for the car. The main effect is that my credit cards get paid off every month and I have a decent cushion in case of emergencies. Dunno how that affects the greater economy.
So what’re your assumptions here? That people will save and then pay in cash rather than buying things on credit? If so, the biggest effect would be on the bottom lines of the credit card companies.
If you’re assuming that people maintain a 20% saving rate all the way up to retirement and never touch it during that time unless laid off or otherwise unemployed, it’s a different story.
A lot of this depends on what type of country is doing this. China saving this much is a lot different than say a Middle East country (excluding Israel and Dubai) than say an African country (exclude Nigeria (for the most part) and South Africa) than a first world nation. Or, more simply put: the US or some other 1st world nation will have a different effect than a developing country or underdeveloped country. Assuming the US is doing this, let’s see if I remember my econ lessons correctly:
Doubtful, at least with today’s economy. A high savings rate implies that there is much less consumerism. I had a micro professor that proferred that if people had much less impulse buying, that a high savings rate could be possible. People would still spend on various levels of whatever, and still be able to signal to manufacturers what they want via the price mechanism. However, with an overall depression of spending, especially if such a transition would happen very rapidly, companies without economists (basically all but the mega corporations and banks) would not see what was developing and have no idea how to analyze the data of reduced spending. If anything, they will look at it as a type of depression and probably lay off people.
Maybe. A lot of the economic downturn still stems from businesses uable to get credit. Having a plethora of large deposits may make it easier for banks to lend out cash. However, banks typically have teams of economists and they’ll know that consumer spending is down. Small businesses will still have a hard time securing loans because small businesses market to joe public consumers, which banks will then see such market plans a large(r) risk.
The good news is that typically a rise in savings rate will cause a drop in the interest rate. So, perhaps mroe capital is available, just it might be too pricey for most small businesses. The tax rate is largely a political matter. I’m not really sure of the analysis, my gut instinct tells me that tax rates would largely be unaffected. Though, if the government is not getting its money from tax revenues from the small businesses, then it might be forced to raise taxes on consumer transactions. If things really get out of hand, expect a VAT or GST type tax and the corresponding black market to go with it.
Probably not. It depends on how much competition there is in the market place, primarily. If no one is hiring, then people will start to accept lower income. Wages are generally “sticky” meaning that people are reluctant to take less money. If businesses find a way to still be competitive (consumer spending shifts from impulse buys and businesses coresspond in sync), then wages will still operate under normal supply and demand of the economy. IOW, if businesses are out of sync with the market, they will see less consumerism as a general depression and be more likely to cut spending, development, invetories, etc. Even if everyone ‘knew’, not everyone has the experience or the even ability to transition. Whatever made a business a leader in its market may not carry over to an economy where everyone saves more.
Probably not. There is a distinction between consumer durable goods (which includes impulse buys) and capital expenditures like cars and houses. Medicine is a different type of market entirely (prescription drugs ideally would be commoditized or go that route, where by services are dependent on the provider’s costs). Assuming a low, particularly stable, interest rate, people would be more inclined to own a home than rent. An increase in ownership will drive up prices. Capital expenditures flock to where the money is. If demand outstrips supply, then prices will rise or remain high.
It depends. I like equilibriums so I would surmise that a new equilibrium would arise. I don’t see small businesses forming into larger businesses to compete with the mega corps. That’s a lot of risk on the individual level. In that aspect, I see it quite possible that things get more expensive because of the barrier to entry would be so high (competing against a mega corp).
Your mixing terms in the last part. Labor creates wealth only in the sense that labor is an instrument. Additionally, the economy is not a zero-sum game or a fixed pie. On the global scale with trillions of dollars to transition, it could easily take more than a decade for a new equilibrium to balance and have the economy run like we’re used to, or it could not happen at all. There’s too much at play here. In general, I would not be too keen of a high savings rate. 10% seems to be fine for most people. My parents who have never seen a layoff could do fine with 10%, but they save close to 25%. One of my friends who is laid off a lot does fine with 10% because he earns a lot of money. A lot of my econ friends who now work at banks are all about debt servicing, which is an entirely different concept.
I’m not seeing how consumer saving would have any kind of tangible positive effect on this. If anything, I would think there would be a negative one, since if consumers are cutting back on their spending then corporations are going to possibly be cutting back on their own budgets…and it seems like R&D would be one of the first places they may look to cut back on to save their bottom lines.
Perhaps, though I think that it would have an at least initial downward effect on both our own economy and the economies of countries that provide goods and services to the US, which probably wouldn’t be good, at least in the short term. I think that eventually a new level or balance would be reached, but it would take time for the various markets to adjust and come back into that balance…and, I expect, the short term effect would actually be more unemployment, both here in the US and abroad.
No, I don’t see that. I think it would drive up unemployment, and I suppose that if unemployment was great enough, and people desperate enough, then THAT could cause wages to drop…but I think that’s an unlikely scenario. My own uninformed take on it is that what would probably happen is short term unemployment followed by a general down turn in GDP and the stock market, which would basically re-balance to some new level after the market re-adjusts to the new spending realities.
As a possible side effect, perhaps, but not directly, no.
Yes, it would hurt our economy in the short term…and it would hurt other countries economies in both the short and medium term. But eventually? I think things will basically stabilize at some new level and life will go on. My WAG is that the US would lose some of it’s current status and purchasing power, over all, and that some other nation or collection of nations would pick up the slack.
Labor doesn’t create wealth, for one thing. Also, you still seem to think that the economy is a zero sum game, with some kind of fixed amount, like a glass of water. If someone wants some of the fixed amount of water, then you have to empty the glass somewhat to give it to them. The reality is that it’s NOT a zero sum game, and the glass can because several glasses full of water, that can then become yet more glasses, etc etc. There isn’t a fixed amount of ‘wealth’ that has to continually be divided between people.
So, the answer to this part is that, no, some people dont have to go into debt because others have saved. However, in the short term, such a policy on a national scale could mean that more people are out of work both here in the US and abroad.
If an employee produces $70,000 in wealth, is paid $35,000 to do it and saves $4,000 he can’t spend that $4,000 on the goods and services made by others.
So it seems he is producing X amount of goods/services, but not consuming an equal amount of them because of his savings. So what happens with that discrepancy between production and consumption?
If everyone on earth saved 20% of their net income, wouldn’t that mean the world had an oversupply of 20% more goods and services than consumption would provide because people were producing 10 units of X a day but only using 8? Or does the money go somewhere else?