The Saving Grace - Economic Review, Third Quarter 1994 - Dallas Fed

A nation’s savings matters. Money set aside from today’s consumption can be invested, through financial markets, in productive assets embodying the latest innovations. A newer and better capital stock can provide the fuel to sustain higher rates of growth and improve living standards. In a nutshell, that’s the current view of many economists, one that places savings among the most important pillars of a nation’s long-term economic health. Michael Mussa, economic counselor and director of research at the International Monetary Fund, summed it up: “Why is saving important? Primarily because investment is important....Growth tends to be high in economies where savings and investments are both high and reasonably well deployed, and growth tends to be poor in economies in which savings and investments are low or not well deployed.” The past decade has brought a greater appreciation of the beneficial role of savings in an economy. Before that, many economists, using Robert Solow’s 1956 work, argued that saving didn’t contribute all that much to growth. Additional saving might increase the capital stock and raise living standards, but it didn’t boost long-run growth prospects. In the 1980s, endogenous growth theorists began to see that additional capital, both physical and human, gave society a growth bonus, usually related to more rapid technological progress. Now, most economists recognize saving as an important factor in growth as well as standards of living. This shift in the profession’s views on saving’s role in economic growth puts a spotlight on a number of related issues. They include: