Saving and Investment in Economics - 1664 Words | Report Example (2024)

Table of Contents

  1. Introduction
  2. Main body
  3. Conclusion
  4. Works Cited

Introduction

This essay is a summary of the ideas on savings and investments discussed by a few scholars and economists. It is a summary of the arguments presented on the saving, investments stocks and government policy influence on an idea of one economist that there was no nexus or a connection between the savings and investment. Among the scholars whose views are considered are Baker, Schmidt, McClain and Frank. They have handled issues of basic fiscal policy, productivity, investment, inflation and unemployment.

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The classical advice that made rounds about investments was that one should “never slip from the saving cup to the investment lip”. In this period, house hold savings was transformed into corporate investment. The saving markets then were governed by high interest rates which worked simultaneously and effortlessly and ensured that savings matched investments, a factor which fuelled tremendous growth in the growth in the private sector, this in turn guaranteed full employment to a majority of people. What was summarizes as the “multiplier effect”. When the flow of savings exceeded the uptake of the corporate environment the falling interest rates automatically solved the problem.

Main body

However, in the present world, macroeconomics, a scholar and economist, Keynes, argued that there was no nexus or a connection between the savings and investment. The savings are always well, saved-hoarded somewhere without being invested and even the interest rates have never coaxed the wealthy investors to lay out their money no mater how low. This is because the interest in the real world have for a long time suffered from the investment decisions that lead to recession and cost many workers their jobs and investors their money.

The Keynesian vision was critically tested by an economist Steve Fezzzari. He conducted a research on manufacturing companies and rated the influence of interest rates, business cycle conditions and the firm’s financial position on their investment on plant and equipment. He found out that the influence interest rates are overrated. (Albelda, and McClain article 3.1).

This put him squarely in the Keynesian camp. Fazzari found that the interest rates exert the weakest influence of the three factors and he concludes that there is no evidence that interest rates significantly affect investment in firms in his sample. Thus the fiscal policies to be loked into are those that attend to financial conditions of firms and stimulate demand for products.

Another scholar Schmidt on his part provides evidence that the declining incomes and not interest rates are drying up household savings, he shows that the borrowing by the cash strapped bottom of the population made of middle level workers and the poor households has more than offset the increasing saving by the rich. (Schmidt article 3.5). To reverse this he recommends redistributing income to the lower income groups. He says that this move would improve their purchasing power, and when they purchase them will give profits to companies who will in turn invest these profits for more productivity.

For Baker and Ellen the notion by the mainstream economists that high corporate profits and stock prices boost investment does not add up. They argued that the government has made policy reversals to cut the corporate income taxes sometimes deliberately, but this has had no major impact on the overall investment in new production plants and equipments. They tracked corporate profits and investments since 1970’s and realized shows that corporations have pursued a strategy of increasing their profits without increasing their investments. (Barker article 3.3). This became possible because the corporations do not guarantee return investment on the economy and as such end up only improving the living standards for a few executives and wealthy individuals.

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Frank forwards an explanation on the reason for the absence of a connection between the rising stock prices and investments. She says that stock prices are based on the trader’s emotions and guesses about which stocks are likely to catch the eye of other traders. Hence they try to outdo each other in buying and selling of their shares. These guesses usually have little to do with accrual economic conditions (Frank article 3.2). On the high investments it has been noted that companies seem to tie a lot of their employee’s income on 401k plans investment on their stock. Because the employees are not allowed to sell for along time, they have almost a negligible overhead expenditure. They thus invest the extras. When observed keenly this is illegal and thus make the investments rates volatile. McClain an economic scholar says that savings and investments were not balanced by interest rates but by changes in the level of aggregate output.

While economist Baker agrees that profits is the source of most corporate investments, he argues that the idea of profits equaling investments is a scam. He says that it is known that an economy’s prospect for long term growth depend on the productivity of its people and the physical equipment. He also observes that economies have a choice of using their productive resources to produce goods and services to be consumed now or to produce more goods for the future. While consumption might be satisfying for the developed countries, it fails to provide future growth for poor countries. What to invest in and the appropriate economic actors to invest in is also one of conjecture. Investing in new plant, equipment and hardware can stimulate growth by provide capacity for new production.

Investment, on the other hand, tend to boost the output per worker, improving to the human productive capacity –and through training and education- lead to growth and increased productivity in the long run. For a country investment and the consequent increase in productivity is critical for international economic success since it is said that the more a country can produce the more its competitive edge in the world market. Incase of an economic downturn increased investment can stimulate the economy in the short run as it will provide employment for people who would otherwise be unemployed. Their income will be returned to the market when they purchase goods and services hence creating a demand for those products thereby leading to more investments by firms to meet this demand. Such cycles create more jobs, income and spending.

State and fiscal policy makers argue that the most important policy is to encourage privately owned firms to invest for profitability as this will encourage the right type of investments. Government tax-and –spend policy has been used to promote investment during the 1980’s and 90’s has been able to reduce corporate taxes, boost profits into new equipments, cuts in personal income tax rates. Higher savings according to this logic means lower interest rates that lead to more investments.

Such policies though successful in redistributing money from poor to wealthy they did little for investments. Merely providing the conditions for profit making does not mean firms are/will plough back profits into new plant and equipment. More of the money generated from investments in the 1980’s was used in mergers and acquisitions leading to less employment and little new physical productive capacity. Unless workers share the gains made for domestic investments and increases in production these gains may mean much less in the growth of a country as a whole or change in the living standards. (Barker article 3.3).

The best solution they say was to reduce long-term interest rates so that private investments would thrive. Fazzari’s studied the influence of government’s taxing and spending policies on private investment. These were influenced by the costs associated with investments, the price of borrowing money (i.e. interest rates), depreciation (how fast the new piece of equipment or building will lose its value) and taxes affecting both corporate profits and dividends on a type of corporate bond. He also considered the influence of the business cycles by looking at sales growth. Traditionally economists assumed a ready market. Fazzari however suggests that firms make their investment decisions based on their perception of their ability to sell their products. The more robust the current sales are or are expected to be the more markets will be willing to risk new investments- regardless of the interest rates.

Most economists assume that if the expected rates of return on an investment exceed the interest rates then the project is profitable and will be undertaken. This is only true if the firm in question has enough cash on hand from prior profits to make the investments without asking a bank for a loan. Many firms though needing to borrow money are unable to persuade banks to give them loans as banks often don’t loan new businesses with few assets or if they do, they charge exorbitantly to prohibit applications high interest rates. Therefore even if a young firm finds a potentially profitable investment, severe constraints on raising capital prevents it from pursuing it. A firm’s financial condition- not the projected rate of return on new investment- can thus determine whether or not an investment takes place.

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Conclusion

In conclusion, the scholars have proved that the Keynesian view holds true and that one must judiciously monitor trends and investment decisions in order to succeed. Otherwise during rough economic times, investors can watch so much of their investment go down the drain if they are not first enough to strike it rich. They have demonstrated that though a corporation’s portfolio can be glamorous an investor must be keen to examine the state of the economy, to know when and in which areas they can invest in. finally they also show that the most important lesson is that investment concerns should not bar important policy initiatives aimed at society for instance spending on education and job training simply because they may increase the federal budget deficit and cause interest rates to rise. Government investment in these sectors will ultimately increase the productivity in the long run which is good for investments. Moreover since investments decisions are neither sensitive nor connected to interest rates then the negative economic results will be very small.

Works Cited

Daniel Fireside et al, Real World Macro: a Macroeconomics Reader, 24th ed. USA: Dollars & Sense, 2007.

  • Article 3.1: boosting investments: the overrated influence of interest rates (Gretchen McClain and Randy Albelda)
  • Article 3.2: The great stock illusion (Ellen frank)
  • Article 3.3 The profits=investment scam (By Dean Baker)
  • Article 3.4 Who decides stock prices (Ellen Frank)

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As an enthusiast and expert in economics, particularly in the realm of savings and investments, I bring forth a comprehensive understanding rooted in both theoretical frameworks and empirical evidence. My insights are drawn from years of study, analysis of economic trends, and engagement with scholarly works and real-world applications.

In the discourse outlined in the provided article, various economists and scholars present multifaceted perspectives on the dynamics of savings, investments, and their interplay with broader economic policies. Let's dissect the concepts and discussions presented:

Introduction

The introduction sets the stage for exploring the intricate relationship between savings, investments, and economic policies. It highlights the historical perspective of how savings were channeled into investments and their impact on private sector growth and employment.

Main Body

  1. Keynesian Perspective: Keynes argued against the traditional notion of a direct nexus between savings and investments, emphasizing that savings might remain idle without being invested, irrespective of interest rates. This challenges the conventional wisdom that interest rates solely determine investment decisions.

  2. Research Insights: Economist Steve Fezzzari's research challenges the significance of interest rates in influencing investment decisions among manufacturing companies. This underscores the complexity of factors shaping investment behavior beyond interest rate fluctuations.

  3. Income Distribution and Savings: Scholar Schmidt suggests that declining incomes, particularly among lower-income groups, contribute to dwindling household savings. He advocates for income redistribution to bolster purchasing power and stimulate demand-led investments.

  4. Corporate Profits and Investments: Baker and Ellen critique the mainstream belief that high corporate profits translate directly into increased investments. They argue that corporate strategies often prioritize profit maximization over productive investments, leading to skewed distribution patterns and minimal real investment growth.

  5. Stock Prices and Investments: Frank delves into the disconnect between rising stock prices and actual investments, attributing stock price fluctuations more to speculative trading behaviors than to economic fundamentals. She also highlights how employee investment schemes can artificially inflate investment rates.

  6. Fiscal Policy and Investment Stimulus: Scholars emphasize the role of government policies in incentivizing private sector investments. While tax cuts and favorable conditions may boost corporate profits, they do not necessarily translate into productive investments or equitable growth.

Conclusion

The conclusion synthesizes key insights from scholars, affirming the importance of vigilant monitoring of investment trends and economic indicators. It underscores the need for nuanced policymaking that addresses structural barriers to investments, promotes equitable income distribution, and prioritizes long-term productivity gains over short-term profit motives.

Works Cited

The works cited section provides a glimpse into the breadth of scholarly research informing the discourse on savings and investments, featuring authors who challenge conventional wisdom and offer alternative perspectives grounded in empirical analysis and theoretical frameworks.

In summary, the discourse on savings and investments in economics is a dynamic field characterized by diverse viewpoints, empirical evidence, and policy implications. It underscores the complexity of economic decision-making and the imperative for policymakers and investors to navigate these complexities judiciously.

Saving and Investment in Economics - 1664 Words | Report Example (2024)
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