In order to pursue this discussion at all, we need to first understand the relationship that exists between savings, spending, and income. The
BEA economists who calculate America's Personal Savings Rate will tell you that money saved is income that is not spent. That is to say:
SAVINGS = INCOME - CONSUMPTION
That's how the economists at the BEA arrive at a total savings figure; they calculate it from income and spending numbers. America's Personal Savings Rate is simply the percentage of total income that is saved:
PSR = SAVINGS / INCOME
or
PSR = (INCOME - CONSUMPTION) / INCOME
If you're mathematically inclined, you'll want to note that if expenditures are constant, a higher INCOME number will result in a higher calculated Personal Savings Rate.
The reason why the nation's calculated Personal Savings Rate does not provide us with useful information on national savings is because BEA economists do not include in their calculation of total personal INCOME the income that households earn from capital gains. They have their reasons for doing this but they are not ultimately good reasons, for capital gains income can be either saved or spent on consumption, just like any other kind of income. If they were to include capital gains income as part of total personal income, the result would be a significantly higher calculated PSR.
From this, we can see why the calculated PSR has declined while the Republicans have been running the Federal government. As they have cut the income tax rates of the wealthy, a greater share of the nation's total income is comprised of capital gains income. This is because the very wealthy are most likely to use the huge gifts of disposable income that the Republicans have given them to buy assets, like stocks and real estate. When those assets appreciate and are sold, they provide income.
It is not, however, this flaw in the calculation of the Personal Savings Rate that tells me that America is currently saving too much. It is unemployment. Far too many Democrat economists have ignored the ultimate economic truth that ALL JOBS IN THE ECONOMY ARE DEPENDENT ON THE SPENDING OF OTHERS (consumers, firms, government). That's where the money comes from that pays everyone's salary: the expenditures of people or organizations. Savings have never created a single job, ever.
When there is any level of unemployment in an economy, it is because too much money is being saved. Think about this for a second. What is a recession? Officially, it is a decline in GDP. GDP is a measurement of aggregate SPENDING. Whenever a nation is having any kind of problem with unemployment, there is only one way to solve the problem, and that is by spending more. Where is the additional spending supposed to come from? Well, didn't we just say a minute ago that any income that isn't spent is money saved? All else equal, whenever there is a drop in aggregate savings, there will automatically, and necessarily, be an increase in spending. More spending means more jobs created.
In another article I've written, I pointed out that increasing the amount of income taxes that are collected from wealthy savers is something that is guaranteed to provide a economic stimulus to the economy. This is because it takes money that would otherwise have been saved (by rich people) and spends it instead. Yes, you heard it right: INCREASING taxes provides a stimulus to the economy if the citizens who are being taxed more are the nation's biggest savers. Increasing the taxes of citizens who would have spent the money that they would be paying in taxes (the poor and working class) would do no good, because the increase in the government's spending would be exactly matched by a decline in consumer spending.
Now, to say that there is too much saving occurring in the economy is not to say that everyone is saving too much. If your country's economy needs a reduction in total savings (an increase in total spending) in order to eliminate unemployment, it makes sense for the federal government to only tax the savings of those who need 'extra savings' the least. The ultra rich should be asked to give up much more of their 'extra savings' than middle-class savers are asked to give up. Indeed, in order for more people in the lower-middle-class to be able to save more without their additional savings hurting the economy, it is necessary to ask the ultra rich to save substantially less. For a number of reasons, the best way to achieve this goal is to simply make the income tax much more steeply progressive.
There is only one "rate" we can refer to that will tell us if the participants in an economy are---collectively---saving enough and that is the employment rate (there are flaws in the unemployment rate). Unfortunately, far too many Democrat economists have embraced without question the `more is better' assumption when it comes to savings. It's a simplistic assumption that is flawed on many levels. Let's hope that they can begin to acknowledge that there are certain times when a net increase in total savings will have a positive effect on the economy (when the economy is experiencing hyperinflation) and other times when additional savings will have a negative effect on the economy (when there is any level of unemployment).
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