My letter to National Review Magazine re: Misunderstanding Savings

Re: Raising Savings, by Allison Schrager

Dear Sirs:
Although Ms. Schrager's heart is in the right place and she says many good things about the need for a higher level of savings, she makes apparent in many places that she really doesn't understand the role of savings in the market process.  I believe that she is blinded by the GNP numbers, which are little more than aggregations of, mostly, consumer spending.  By relying upon GNP as the barometer of the economy, then of course any reduction in spending appears to be harmful.  But this is not the case.  No one would disagree that what is spent cannot be saved.  But where does the savings go?  It goes into the investable funds pool to finance stages of the production process that are further removed from final consumption.  Spanish economist Jesus Huerta de Soto estimates that business to business spending accounts for over seventy percent of economic activity. Very little of this is captured by GNP statistics.

Government should not try to guide the economy in any way.  It should not try to encourage either spending or savings.  Such decisions are the personal choice of millions of Americans, based upon their "time preference"; i.e., their preference for consuming in the present rather than delaying consumption, saving now, and consuming more in the future.  Time preference is different for different people and changes constantly for a variety of reasons.  No economic czar can determine the right amount of savings, because to do so assumes that it is possible for him to determine the aggregate time preference for the entire economy. But we don't need a czar, because we have the market, which does the job for us, as long as government keeps its grubby hands off, that is.