Brian Lee Crowley

Saving is spending: The One Percent, investment and innovation

MLI hosted a debate earlier this week about whether Canadians should worry about income inequality. One of the common economic fallacies that found its way into the debate was the idea that people low down the income scale spend all their income and therefore stimulate the economy, whereas the rich can only consume a part of their income and therefore the potential economic activity that cvould be generated by the unspent income is somehow vapourised.

Au contraire!

The excess not consumed must be invested. That’s why saving is a particularly useful and powerful sort of spending. In the hands of the One Percent such capital accumulation has driven many innovations in technology, space travel, corporate management and much much more. That’s pretty much the summary of the Globe column the debate inspired me to write for the ROB’s Economy Lab.

Took the Occupy Movement et al about 5 minutes after the column appeared to launch a Twitter campaign accusing me of everything but eating babies (but then the day is young!). Just spell my name right, folks….

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Invest in this!

On of my greatest bugbears is the abuse of language, for as the Chinese remind us, when words cease to carry clear and definite meaning, we cannot talk successfully to one another and what needs to be done remains undone.

High on my list of “linguistic abominations to be resisted” is the intellectually lazy language of politicians who are always promising to “invest” in their favourite spending programme. Elect me, they intone, and I will “invest” in (pick any of) health care or pensions, or EI, or welfare, or civil service salaries or innovation (whatever that is, other than doing new things…).

What’s wrong with this language? Investment actually means something quite precise. Here, from a recent issue of The Economist, is a classic definition of what’s at stake:

The goal of economic policy should be to maximise households’ well-being and hence their consumption—but over time, not just today. Consuming too much today will make the next generation poorer. By investing (and saving), a country sacrifices current consumption but future output and consumption will be higher. The optimal level of investment is the rate that generates the highest sustainable level of consumption over time.

So there is an important distinction between consumption and investment. When you consume something, as its name implies, you use it up  –it is gone. Consumption is the ultimate end or the objective of all economic activity — we work hard so that we can consume food and clothes and cars and clean air and all the other good things that we want. But to be able to consume successfully *over time*, to be able to enjoy a rising standard of living over the years, we can’t simply use up everything we make today. We have to set aside some portion of what we make today and invest it in long-lived tools that allow us to consume more in future. If we consumed everything we made today, we would enjoy nicer clothes and richer food and more theatre tickets, but because we didn’t save anything to preserve our standard of living over time, soon we’d not be able to afford a car, and we’d have to give up the house and move into an apartment, renting the space we lived in but not building up any equity in it. Our standard of living would decline….

Government is no different. When it takes our tax dollars and spends them on things used up today, such as civil servants’ salaries or social welfare payments or grants to business, they are not investing. They are consuming. There is nothing wrong with consumption, but if we overconsume today and underinvest for tomorrow, the long term consequence is a declining standard of living.

A classic example is infrastructure. For example many of our cities are limping along with infrastructure such as sewers and water mains that are very old — well past their useful life. We have been consuming the investments of our ancestors, but not saving up to replace them — a classic case of enjoying a higher standard of living today at the expense of tomorrow. Underinvesting (because we’re having too good a time consuming today) is very bit as morally reprehensible as long-term deficit financing of public spending, because in both cases we are making our children pay the costs of our decisions. And we’ll only fix that if we challenge politicians about the abuse of language involved whenever they turn consumption today into “investments”. It ain’t so…

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Brian Lee Crowley
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