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The myth of national savings drives Samuel Brittan The Financial Times 05/08/05 Since ancient Babylon, preachers, prophets, kings and politicians have been exhorting people to do other than what comes naturally; and often they are wrong. Today I want to tackle the myth of national savings, or our patriotic duty to consume less than we feel inclined to do. The present discussion is far too "micro" and excessively focused on pensions. The macro problem arises because, in complicated societies, those who save are not identical to those who invest. Companies and individuals can increase their investment by drawing on the savings of others. So long as the rate of interest can balance the two there is still little problem. People can make up their own minds whether to consume tomorrow or today and how much it is worth borrowing to increase their capital. Nevertheless, we have been besieged with exhortations to save more. For many decades every British chancellor would include in his Budget speech an encomium to Lord Mackintosh, the longtime chairman of the National Savings Movement. There were also model fighter aircraft in London’s Trafalgar Square associated with second world war savings drives. The propaganda was misleading. In a period of war the military effort comes first and civilians have to make do with what is left. The problem for governments is to hold down civilian spending without excessive inflation. I remember Milton Friedman saying that the posters should have said not, "Save to build a battleship" but "Save to keep prices down". The excuse for continuing savings propaganda in peacetime is the supposed need to increase physical investment. Even if we accept this "need", the case for savings drives is not made. Between the world wars Lord Keynes pointed out that an excessive attempt to save could bring about a slump. He himself advocated public investment to mop up the savings surplus. He could equally well have campaigned for lower savings. In today's globalised economy there is another critique of savings drives. It is simply that a country’s investment is not limited by domestic savings, even if its economy is working at capacity, as it can draw upon the surplus savings elsewhere – as the US has been doing in a big way and Britain in a smaller way. Similarly, countries with large savings surpluses can, like China, pile up foreign assets. The most thorough application I have seen of both these ideas to the present-day world comes from Andrew Smithers, the financial analyst (Report no. 245 July 12). There is, he suggests, a fundamental worldwide "ex-ante" savings surplus. This means that the private sector wishes to save more than it wishes to invest. Large fiscal deficits and very low real interest rates arise from the attempts by individual countries to prevent or postpone the worldwide recession that would otherwise occur. These policies have created the famous imbalances. The optimum response would be for US and UK savings to rise but for savings to fall elsewhere. If only! "No credible economic policy is being propounded to deal with these imbalances. An end to rising US house prices or stock market fall would make recession probable," writes Mr Smithers. In the present world conjuncture the last thing we need is for the US to start saving much more, either through draconian cuts in its budget deficit or through greater thrift on the part of its citizens. This would simply add to the very high Asian levels of savings and the moderately high continental European levels. It could then be difficult for real interest rates to fall enough to accommodate such a surge in world savings. No amount of currency revaluation – let alone the minuscule recent revaluation of the renminbi – could stop it happening. I do not, however, want to go to the other extreme and urge people to save less for the sake of the world economy. Estimates of what is desirable from that point of view are highly fallible and, in any case, somebody opening a savings account could well reply: "What has the world economy done for me?" Is it not better for people to make their own savings decisions in the light of their personal circumstances and for the welfare state to supplement deficiencies according to the values and trade-offs prevailing in each particular society? The task of making sure that individual savings decisions promote neither a world slump nor world inflation devolves on central banks and finance ministries. We know that the US Federal Reserve has given thought to expedients to adopt if the US were caught in a "liquidity trap" in which the rate of interest required to balance the economy was too low to be achieved by orthodox monetary policy. There is no need to test these expedients prematurely by national savings drives.
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