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June 25, 2010



"We never had a savings culture" is hardly the best argument against trying to develop one, Chris.

But you're right, the state has no business trying to decide what is the "right" amount of saving, and IDS would have come in for some Austrian scolding if Hayek were still around.

On the other hand, the state has no business distorting the market to *discourage* saving either; one could argue that current interest rate policy (artificially low rates to encourage borrowing) has that effect, so perhaps IDS should turn his attention thence before worrying about changing the culture.


Exactly Neil. Its not just current interest rate policy, the 'culture' IDS talks about has been carefully nurtured by the Thatcherite policies of the last 30 years.


Maybe people have been saving in different ways - i.e. more in their pensions, or more in their housing (knowing they will live long enough to be able to downsize their house and release the equity). Do the savings stats account for this? I doubt it.

I'm saving a lot now. But then I am one of the quangocrats facing redundancy apparently doing nothing at all every day except creating waste.

The Man Without Fear

Just interested: why is 1946 the cut-off point for the statistics?


Glenn - the stats do not include house price appreciation, but they do include pension contributions.
The ONS database just happens to start in 1946. Charles Feinstein calculated the savings ratio for the years 1920-38. His figures show that it was negative in the early 20s, rising to a little over 5% in the late 30s.


Pablo: I'm not sure I'd characterise low interest rates as being unique to Thatcherism; indeed interest rates under Thatcher were generally much higher than at any time in the last two decades (I Googled it: the lowest they ever got under her was 7.38%, and they were back up to 13.88% by the time she left office.)

Rather, I think they're a symptom of our obsession with GDP as a metric for the health of the economy (confusing the proxy for the thing itself), and with politicians' determination to produce the highest possible figures during their term in office, regardless of later consequences.

Low interest rates now mean short-term GDP growth, but also the risk of mis-investments causing bubbles that will burst later. To a politician, looking at no more than a decade in office, the appearance of growth now is more important than protecting against a hypothetical bust years down the line.

Charles Barry

An important, and in my opinion unanswered question is why do we need a high savings ratio, or a high rate of savings?

What possible benefits does it confer? Saving more than is strictly necessary reduces economic growth (lower consumption/AD) and reduces the quality of life for people (they have to be more scrooge-like).

Of course, we need some savings to maintain a sustainable level of investment (to increase capacity and long-run productivity). But we're not China or Korea. We're not growing at 10% a year, so we don't need a savings rate of 20%, 30%, 40%.

For a good example of the problems excess savings causes, look at Japan. Japan has a massive structural imbalance caused by exporting too much and spending too little. Japan would be in a much better position if it used the proceeds from exports to spend on domestic demand, rather than hoard unnecessarily.

Furthermore, Japan does not benefit from the excess savings because the modern financial system simply means that these get funnelled abroad to more profitable investments. So all higher excess savings means is depriving present growth for no future return.

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