Relationships Between Savings & Long-Term Economic Growth

Savings drive the economy.

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Compared with people in other industrialized nations, Americans do not save a lot of money -- something on the magnitude of 4 percent or 5 percent of their incomes on the average. Although saving is a habit we are all instructed to make as children, we seem to fall short as adults. This low savings rate has implications for the nation’s economic future, for savings is the source of economic growth.

A Couple of Definitions

When people talk about saving money, they usually include things such as buying CDs at the bank, and investing in stocks or mutual funds. But economists use the term in a more specific context. When people receive income they have a choice -- either spend it on current consumption or save it. From their personal perspective, those saved dollars represent future spending power: Save it today and spend it tomorrow. And if the savings instruments are successful, the savings will generate interest, dividends or capital gains. To the economist, investing means adding to the nation’s capital stock -- factories, assembly lines, equipment and tools. Individuals save; businesses invest.

What's So Great About Growth

People want more wealth and the things wealth can buy. And people want their children to have better lives and more property than they had. With an expanding population, there are more, with growing demand. With no economic growth, the only way for one person to have more is at the expense of someone else. But a growing economy provides the opportunity for everyone to achieve their goals. It is not guaranteed, it's just an opportunity.

Determinants of Growth

Factors that determine economic growth include technological change and capital accumulation; capital includes both physical capital and human capital. Farming, for example, can be done with mules and plows. But if the farmers have tractors they can accomplish much more, and if you give them combines and other specialized equipment they can feed the world. To fuel technology and aid capital accumulation there must be resources, and that is where savings comes into play. When people deposit money into savings accounts, the bank does not hold that money. Instead it lends it to someone who builds a house, starts a business or finances an inventory. These activities create jobs, wealth and economic growth.

How We Save

Savings patterns change according to peoples’ life stages. Young people tend to have low savings rates because they are accumulating goods. People in their middle age save at a higher rate because their incomes have risen and they have all the furniture and toys they want. Seniors revert to low or even negative savings, because they lost their incomes when they retired. As the American population ages it is likely that the savings rate will remain low or slide even further.