Matt Yglesias walks into a mine field

A few weeks ago I argued that saving was nothing more than resources put into producing capital goods.  Period.  End of story.  This isn’t a theory, it is a definition.  And I accused several bloggers of forgetting that identity when they overlooked the impact of consumption smoothing on investment.

Now Matt Yglesias says almost exactly the same thing:

As an individual, the way you save for the future is you reduce the dollar value of your consumption to below the dollar value of your income and then you take the difference and invest it in something. That something could be a bank account or a stock index funds or a treasury bond or whatever. But the point is that your saving of money turns into investments in financial instruments. On a social level, what we say is that savings equals investment by definition. In a given quarter the economy as a whole produces a bunch of stuff. That stuff is either exported abroad, consumed by households or the government, or else it’s investment. This is””to repeat””a stipulative definition. 

.   .   .

The relevant issue then becomes what do we stockpile. A lot of the stuff we make has a pretty short shelf-life. Computer software gets obsolete super fast. Clothing wears out. Food spoils (even Twinkies). Durable goods like cars last longer. Airplanes last even longer. But the real durability is in structures. Houses, office buildings, bridges, tunnels, factories, train tracks. As a society, we save for the future by channeling resources””steel, electricity, human labor power””into the production of things that last a long time rather than things that are more perishable.

Let’s see if he receives the same criticism I received.


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24 Responses to “Matt Yglesias walks into a mine field”

  1. Gravatar of Daniel Daniel
    16. February 2012 at 13:27

    You are a better economist than Yglesias.

    Yglesias is a better writer than you.

    He has a comparative advantage in getting his point across.

    (An absolute advantage, too.)

  2. Gravatar of foosion foosion
    16. February 2012 at 13:33

    Wasn’t the criticism about the difference between accounting identities and desired levels?

  3. Gravatar of Keith Keith
    16. February 2012 at 13:44

    Didn’t know savings = producing capital goods was such a controversy.

    On a personal note, wish more income allocated toward “savings” actually made into savings. Wish when I put income into the bank, it financed a local business to acquire capital goods rather than buy treasuries to finance government provided consumption goods.

    Come to think of it, perhaps this is a part of our economic woes: income allocated toward “savings” being re-allocated toward consumption goods rather than making its way toward capital goods (actual savings). But, of course, I was under the assumption that savings drove economic growth by expanding our capital base and hence increasing production and that increased prosperity was driven by the greater productivity that each new generation of capital goods brought. But, if savings does not equal investment in capital goods, perhaps I had it all wrong.

  4. Gravatar of JL JL
    16. February 2012 at 13:49

    I’m with Daniel, though I wouldn’t say that Yglesias is a better writer.

    W.r.t this topic, I would put the posts side by side, most notably:

    “As an individual, the way you save for the future is you reduce the dollar value of your consumption to below the dollar value of your income and then you take the difference and invest it in something. That something could be a bank account or a stock index funds or a treasury bond or whatever.”

    “Saving isn’t “setting money aside,” it’s BUILDING CAPITAL GOODS”

    For us mere mortals, saving = setting money aside.
    Really, honestly, even-if-I-understand-Scott-Sumners-point:
    At the end of the day I save by setting money aside.

    Yglesias doesn’t argue against that intuition, but Scott solicits intuitive, emotional disagreement.

  5. Gravatar of ssumner ssumner
    16. February 2012 at 13:56

    Daniel, I don’t agree with your first point, but I do agree with the rest of them.

    foosion, No, I was exclusively considering actual S&I, not desired; I made that point several times.

    Keith, You said;

    “Didn’t know savings = producing capital goods was such a controversy.”

    Check out the comment sections of my posts criticizing Wren-Lewis. Most people seemed to disagree with me. I think it seems obviously true only because Matt explained it in such a clear and authoritative way. You’d look foolish disagreeing with him.

    JL, I should have beem more clear that I meant aggregate saving is building capital goods.

  6. Gravatar of Greg Ransom Greg Ransom
    16. February 2012 at 14:22

    Scott’s account of a “theory” = something useful

    Scott’s account of a “definition” = something useful

    So,

    a definition = a theory

  7. Gravatar of Bill Woolsey Bill Woolsey
    16. February 2012 at 16:37

    The only way society as a whole can move consumption from the present to the future is to produce capital goods rather than consumer goods.

    However, saving for an individual or society as a whole is not the same thing as buying capital goods.

    Saving is just not buying consumer goods.

  8. Gravatar of Scott H. Scott H.
    16. February 2012 at 17:03

    As I understood your critics, they claimed the identity (S=I), while true over the long term, is not necessarily true in real time.

    I have a question, though. My understanding is that banks can take my deposits and, based on their reserve requirements, create money by loaning out up to 10x what I deposited. Given that bank function, why couldn’t we see 10xS=I ???

  9. Gravatar of Morgan Warstler Morgan Warstler
    16. February 2012 at 17:47

    Matty’s readership has a far lower avg. IQ

    Matty is smart enough to crib.

    Matty’s intellectual arc is far more interesting. He’ll end up liberaltarian, because once public employees are crushed, the more efficient the gvt becomes, the more it sells itself in a positive light, and the greater the safety net.

    He’ll stop arguing for higher taxes, and focus on the gvt. paying daycare workers lower wages so mommies can have universal daycare.

  10. Gravatar of ssumner ssumner
    16. February 2012 at 18:39

    Greg Ransom believes a snow blower is useful

    Greg Ransom believes a toaster is useful

    Therefore Greg Ransom believes a toaster is a snow blower.

    Bill, No saving isn’t buying capital, it’s building capital.

    Scott H. No, it’s true every single second of the day.

    When you put money in the bank, it doesn’t increase aggregate saving. Nor do bank loans do so (regardless of the multiplier.)

    Morgan, One of his more interesting posts argued that there wasn’t much difference between very low tax Singapore and very high tax Sweden.

  11. Gravatar of mbk mbk
    16. February 2012 at 20:48

    The intuitive link between savings and investment is lost in a world where interest rates on bank deposits are practically nil. There is no meaningful difference between money under a mattress and 0.25% p.a. interest on savings. Hence the popular intuition “saving = hoarding”, never mind that money in a savings account is a loan to a bank, not money put on the side. Aggregate savings as a construct is a whole different can of worms.

    Loved the snow blower / toaster syllogism.

  12. Gravatar of nemi nemi
    17. February 2012 at 03:00

    Unless you also have a personal definition of capital goods, new capital goods are certainly not = I.

    http://en.wikipedia.org/wiki/Capital_good

  13. Gravatar of Bill Woolsey Bill Woolsey
    17. February 2012 at 04:49

    Saving for the individual is hardly ever building capital goods. I guess a produce of capital goods that uses some of its own capital goods in production could undertake business saving by producing capital goods for its own use.

    But for society, saving is still not buying consumer goods. (I am not saying not produce them.) And that isn’t the same thing as producing capital goods.

    The basic identity of macroeconomics is very income expenditure oriented. Saving equals investment by definition is not a good way to look at it. It is true, but deceptive.

    Income equals output. And output equals realized expenditure.

    That makes realized income and realized expenditure always equal.

    In a no inventory economy, like all services, if goods aren’t produced and sold, then income is not earned. Of course, “supply” of resources, the income people would like to earn has nothing to do with it. What is actual bought generates an exactly equal income to those who sold it. Since those selling it are generally firms made up of workers, capitals, and entrepreneurs, this income is divied up among them. But together, they get an income exactly equal to what they sell. And that is exactly equal to what is purchased.

    Some types of expenditure counts as consumption. Others don’t. If you call all the others “investment,” then total expenditure less consumption is investment.

    If you say that income less consumption is saving, then if income equals expenditure, saving equals investment.

    But then, to say that people earn income, and they spend some of it on consumer goods, and then do something with the rest of it. But by definition, they must be producing capital goods, is wrongheaded.

    A key element of macroeconomics is explaining how the decision of households both individually and as a whole to buy consumer goods or else purchase finanical assets, pay down debts, or accumulate money, is coordinated with the decisions of firms to produce consumer goods or else capital goods.

    To bring up in that context, realized income equals realized expenditure, and by defining income less consumption as saving and expenditure less consumption as investment, so realized saving equals realized investment is nothing but confusing.

    The basic identity of macro says nothing about saving being about moving consumption to the future. It says nothing about investment being producing goods for the future. Saving is income less consumption and investment is expenditure less consumption.

    The fact that society as a whole can only move consumption from present to future by producing fewer consumer goods now and more capital goods is about the coordination problem of how individual decisions go consume or save by pruchasing assets, etc. gets coordinated with the decisions of firms to produce consumer goods now or in the future. As you can see, the firm decision problem is about moving consumption from the present to the future for society as a whole. But this is a problem about coordination of plans, not a definition.

  14. Gravatar of ssumner ssumner
    17. February 2012 at 06:07

    Thanks mbk.

    Nemi, Nope, I use the standard definition, as does Matt.

    Bill, It seems to me that your objection applies more to desired saving and investment, which may differ.

  15. Gravatar of Vivian Darkbloom Vivian Darkbloom
    17. February 2012 at 07:32

    “When you put money in the bank, it doesn’t increase aggregate saving. Nor do bank loans do so (regardless of the multiplier.)”

    Let me see if I’ve got this right (to borrow from both Sumner, above, and Yglesias):

    I put a dollar in the bank. Another customer of the bank uses his credit card to buy a Twinkie for $1. There is no increase in aggregate savings.

    I put a dollar in the bank. The bank lends the dollar to a builder who uses it to purchase a bolt that is used to construct a bridge. There is an increase in aggregate savings of $1 (until such time as the bolt is fully depreciated).

    Depending on the method of depreciation used, the quality of the bridge and the efficiency of its construction, accounting for $1 of “saving” may ultimately overstate or understate “saving” in the real sense rather than merely the accounting sense, but accounting for that with accounting is the best method we’ve got. The measure of our savings is only as good as our accounting.

  16. Gravatar of Vivian Darkbloom Vivian Darkbloom
    17. February 2012 at 07:41

    Just to be clear, I assumed in the above example that someone desperate enough to put a Twinkie on a credit card would eat it right away.

  17. Gravatar of Scott B. Scott B.
    17. February 2012 at 11:17

    Wait, so if I choose to “save” part of my income by putting it into my basement to make a pool (a la Scrooge McDuck), I’m by definition “investing” it? Seems more like macroeconomics has a terminology problem, especially if Nobel prize winners and tenured economics professors can spend a week arguing about it.

    It would seem to me that Matt Yglesias is missing this point too. Banks, companies like Apple, etc. are all in the process of “investing” their proverbial piles of cash in Scrooge-McDuck-style money swimming pools instead of what most people would consider actual investment (i.e., houses, machines, highways, etc.). The (perhaps New) Keynesian answer is that, absent the monetary authorities doing their job and keeping us out of this type of liquidity trap, the government has to step in and surreptitiously build what looks like a giant money swimming pool but is actually a funnel to public works projects.

    I’m all for free markets, so I’d prefer the Federal reserve just send checks to everyone to target some percent of NGDP (or better yet, not let this happen in the first place), and then we can all decide to commission what we want (maybe throw a bone to us big-government liberals and send a big check to the US government as well to build a new rail line or something; we could have a state-by-state lottery). But the “investing” in giant piles of money needs to stop.

  18. Gravatar of Morgan Warstler Morgan Warstler
    17. February 2012 at 11:20

    Twinkies never depreciate.

  19. Gravatar of Vivian Darkbloom Vivian Darkbloom
    17. February 2012 at 13:43

    “Twinkies never depreciate”.

    It is possible that they merely accumulate around one’s midsection. But, is that an asset or a liability?

  20. Gravatar of D R D R
    17. February 2012 at 14:29

    Scott B,

    If you start with $100 and you don’t spend it, technically you have “saved” it, but you haven’t “increased your savings.”

    Sumner’s point is that in any given period, S=I ex-post. To the extent that any individual act of saving fails to increase investment, there must be a corresponding act of dissaving elsewhere in the economy– even if the dissaving is through a fall in income.

    For example, I may suddenly stop buying alcohol. This results in increased alcohol on the shelves, which counts as inventory increases, which counts as investment.

    I also may suddenly stop going on thrill rides. This results in a fall in income to the amusement park, which counts as a fall in saving. (Note that the park may then try to maintain savings by spending less, then that just pushes it off to someone else)

    I’m more wary about Sumner’s statement in the sense that private saving is typically defined not as I, but as something closer to Y-C-T = (Y-C-G) + (G-T) = (I+NX) – (T-G) so S = (Y-C-T) + (T-G) = I+NX

  21. Gravatar of ssumner ssumner
    18. February 2012 at 07:28

    Vivian, Yes, the construction of the bolt is gross saving. The net increase in bolts (construction minus depreciation) is net saving.

    Scott B. You asked:

    “Wait, so if I choose to “save” part of my income by putting it into my basement to make a pool”

    Yes, if the pool makes your hose more valuable, the cost of constructing the pool is saving.

    DR, You said:

    “If you start with $100 and you don’t spend it, technically you have “saved” it, but you haven’t “increased your savings.””

    That’s right. If you accumulate dollars then someone else is reducing their holdings of dollars. You are saving and the other person is dissaving an equal amount. That assumes a fixed stock of dollars. If the government issues new dollars they are dissaving and the holders of the new dollars are saving.

    I am talking about total saving, including government. If you just want to look at private saving, then I agree that S doesn’t equal I.

  22. Gravatar of Major_Freedom Major_Freedom
    26. February 2012 at 16:12

    That assumes a fixed stock of dollars. If the government issues new dollars they are dissaving and the holders of the new dollars are saving.

    You can’t dissave unless you first earned.

  23. Gravatar of ssumner ssumner
    28. February 2012 at 05:55

    Major, Of course you can, do you even know what dissaving means?

  24. Gravatar of Major_Freedom Major_Freedom
    1. March 2012 at 22:29

    ssumner:

    Major, Of course you can, do you even know what dissaving means?

    Yes, it means transferring your money property to someone else thus becoming their property. But in order to do that, you had to have already earned money in the past, such that is currently your property in the present.

    That is why dissaving requires past earning of money.

    Well, everyone except the Fed and the state, and civilian criminals.

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