Saving as a Burden on Future Generations

It is common to hear claims that public debt imposes a burden on future generations – a claim that is nonsensical in a sovereign nation with a flexible exchange rate and fiat money. It is truer to say that saving can impose a burden on future generations.

Saving gives the current generation (and its offspring) a claim on future output that is beyond the control of members of future generations without in itself doing anything to raise future productive potential. The act of saving does not, in itself, make a sacrifice for future generations. It does, however, involve a sacrifice of current output unless private investment or government expenditure increases to maintain demand. So saving is a sacrifice, but not one that helps future generations.

There is a way in which the current generation can make sacrifices for future generations. It is to invest in infrastructure, education, technology, environmentally sustainable production methods, etc., that will raise the productive potential of future generations. The sacrifice of the current generation is to devote some resources to activities that do not add to current consumption. That is, the current generation chooses to give up some consumption so that future generations can generate more consumption possibilities than would otherwise be the case.

When viewed in this light, the fierce and never-ending debate in economic theory over the determinants of saving and investment is seen to have strongly ideological and class-interested motivations. Are prior savings necessary for investment to take place and does “saving bring forth its own investment”? If so, every act of saving is at the same time a sacrifice for future generations, because it leads automatically to investment. Here, saving appears as the sacrifice to which investment merely gives real expression in the form of forgone current consumption.

This is partly why the capital debates held such import. For neoclassical economists, private investment in the long run is supposed to adjust to the full-employment level of saving through real interest-rate adjustments. But, as leading neoclassical economists were forced to concede, the well-behaved ‘demand for capital’ function on which this theory rested was invalid – a fallacy of composition. At the aggregate level, it is not valid to argue that there is a monotonic inverse relationship between the real rate of interest and private investment. One implication of this for the non-neoclassical participants in the debate – though only one of many – was that there are no established theoretical grounds for supposing “saving calls forth its own investment”. Say’s Law does not hold, even in the long run.

If saving and investment are separate acts, undertaken by different economic actors, with different determinants, and there is no reason to believe investment will settle in equality with saving at just the right level to ensure full employment – which is the position of Keynes and Marx influenced economists – then saving’s status as sacrifice looks shaky, and the ideological and class-interested motivation for defending a claim on the output of future generations more transparent.

For Keynes and Marx influenced economists, saving is a function of income. Saving, from this perspective, is not brought into equality with private investment through real interest-rate adjustments. Rather, investment (and other demand expenditures) influence the level of output and income, and hence saving. Investment creates saving, rather than saving calling forth investment.

The argument is not that saving is unnecessary under capitalist social relations. The argument is, first, that prior saving is not necessary to fund investment, and so a lack of prior savings should not be used as justification for allowing the economy to operate below the full-employment level. Instead, full employment should be attained and saving will follow as a consequence. Second, the argument is that saving now does not in itself enable society to consume more in the future. It is investment (whether public or private) that does that. Third, if society invests now, the resulting savings – and claims on future output – impose less of a real burden on future generations, because those claims are accompanied by an enhanced productive capacity that future generations receive as a “gift” from earlier generations. Fourth, the typically unequal distribution of claims on future output (in the form of accumulated savings) produces and reproduces, via inheritance, a rentier class that imposes a burden on the productive members of society, and this raises additional policy considerations.

Imagine two generations of a hypothetical society. Suppose the first generation places great emphasis on private saving in an economy that is operating below full employment, and that strong political pressure for “fiscal discipline” means that the government does not use deficit expenditure to eliminate unemployment. The private saving is a leakage from expenditure, and so subtracts from first-generation output, and therefore reduces the amount of real output and hence real wealth that is produced by this first generation. The result of the saving is that the first generation passes on to the next generation less real wealth but some private saving in money form.

Does the first generation’s decision to forgo full employment for the sake of saving make it possible for the second generation to produce and consume more output? No. The second generation will have less capacity to produce and consume output than would have been the case if the first generation had chosen to maintain full employment. The reason is that the saving, by subtracting from expenditure, meant that the first generation produced less infrastructure, education, innovations, etc., than it could have if resources were fully utilized. So the notion that saving now enables greater purchases later is inapplicable at the aggregate level. It is the reverse: saving now – considered in isolation – reduces future consumption possibilities.

In addition to having a negative impact on society’s productive capacity, the private saving also has a distributive effect which places a burden on the second generation. Savings provide some members of the second generation (those who inherit savings) with a nominal claim on second-generation output. Some members of the second generation will have sufficient savings not to have to engage in productive activity. Those who do engage in productive activity will therefore partly be doing so to provide for those with savings inherited from the first generation.

So private saving considered in isolation has two effects: (i) it reduces the second generation’s productive capacity; and (ii) lays claim to a part of the smaller possible output of the second generation.

Seen in this light, fiscal policy that is used to boost demand addresses point (i). The government can spend just enough to facilitate private saving intentions as well as ensure that resources are fully utilized. This enables greater production of infrastructure, education, plant, machinery, etc., as well as output for current consumption.

Fiscal policy can also be used to address the fact that past private saving results in claims on current production (point (ii)). Taxes can be designed to provide incentives for productive activity and disincentives for idleness (of working-age people) to the extent that this is determined, through democratic means, to be appropriate.


2 thoughts on “Saving as a Burden on Future Generations

  1. Wow, this is an awesome post, lucid and concise. A+!

    Peter, I’ve been thinking about the role of govt in satisfying the savings desires of the non-govt sector and I think that if there are people who wish to postpone consumption/investment and save, then the govt should allow it but, as we know, since this desire to save is primary, the govt should not accommodate it with interest rate (this is essentially Mosler’s natural rate is 0 idea paraphrased.) However, it is only fair to ensure that those savers – who can decide to save for totally legitimate reasons, such as saving for a rainy day, a buffer against uncertainty, education etc – can be assured of the purchasing power of their savings. This can be accommodated by the govt issuing bonds that pay only the inflation rate. Like the TIPS we now have in the US, except that these are the only bonds issued, there is no fixed rate component and there are no auctions – “take it or leave it”. This scheme allows the savers can preserve the purchasing power of their dollars (up to one period adjustment), and, I think, because the govt will be paying the interest looking back one period, it might also withstand the IGBC, although I need to think about it some more (not that we MMTers care about IGBC that much… or at all).
    There is a slight complication arsing from indexing being in itself inflationary, but I think it can be put to rest easily: if the the propensity to consume out of the interest income is less than 1, then the contribution from indexing goes to 0.

  2. Thanks for your thoughts. Well reasoned, as always.

    Under current social arrangements, I agree that there are legitimate reasons for private saving but no productive basis for a positive real return on that saving. Like the return to capital itself, the return to saving is received simply on the basis of ownership of a claim over some of society’s labor time. In the case of the capitalist, at least the prospective return on investment encourages the conversion of the claim into means of production to aid in the productive process. The interest paid to a saver plays no such role in facilitating production.

    The interest paid on saving is therefore really just a transfer. There are undoubtedly normative reasons for providing transfers to some members of society, but it is hard to see why savers should receive such transfers in preference to non-savers. To the contrary, it is conceivable that a transfer from savers to non-savers might be deemed appropriate.

    It is a normative question. Your suggestion that the real value of saving be preserved is one possible normative judgment.

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