Saving is Good for the Economy

The Freeman, the monthly publication of the Foundation for Economic Education, has a good article on the ridiculous economic argument that savings is bad for the economy.  This argument typically is used to justify more government spending, with the notion that government spends all the money it collects, but individual actors save some of it.  (Of course, those that make this claim also use the rhetoric that government spending is “investments” in the future, while private savings, which actually is investment, is bad).

Here is the key passage:

If people are “saving” by simply increasing their holdings of currency (say under the storied mattress), then the critics have a point. Those resources are being withdrawn from the larger economy, and to that degree they will reduce conventional measures of economic well-being. Of course, those increased currency holdings will improve the well-being of their owner, as he or she is now holding wealth in the preferred form of currency.

This isn’t how it usually goes, though. Most saving takes the form of financial instruments, including everything from basic checking accounts to the fanciest investment tools. If people are keeping higher checking account balances or putting more in savings accounts or money market mutual funds, then that wealth is not withdrawn from the economy. It is simply channeled elsewhere than into consumer goods. Financial institutions that accept such deposits lend them to customers who invest in their businesses. This is the process of creating the capital that is the sine qua non of sustainable, long-term economic growth.

Unfortunately, this mentality is the source of Pennsylvania’s Spending Problem