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Many governments try to decrease savings in the economy so that recessions do not occur. Does it make sense for savings and poverty to coexist though at significant scales?

Let's say a population was both in widespread poverty and they had savings. If they had unmet needs, they would spend their money on those needs. This would occur until either savings where expended or the needs where met.

If savings where bad and caused poverty, it would eliminate itself it seems. So either it is bad, but doesn't need to be discouraged since it eliminates itself, or is good and doesn't need to be discouraged.

I guess the problem could be if savings where uneven, but then

  • That doesn't mean savings are universally bad, just savings of the non-poor.
  • If there is a recession, people will have less money to buy things, and so things will need to be sold for less. This will encourage people with savings to spend.
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  • $\begingroup$ Are you asking whether or not it is sensible for there to be large sums of private savings and high levels of poverty simultaneously? $\endgroup$ – 123 May 3 '16 at 1:28
  • $\begingroup$ @123 That is correct $\endgroup$ – PyRulez May 3 '16 at 1:32
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    $\begingroup$ I think you have two questions: One is about levels (can poverty coexist with high savings, the answer is Yes. China has enormous fraction of income saved and still, it has a large degree of poverty). The other is about changes: does it make sense for a poor country to motivate a decrease in savings during a recession to try to escape it? The answer is Yes too but with qualifiers. A poor country is clearly better off exiting the recession than staying. But poor countries are often in the brink of non-payment problems. In that case, the increase in spending creates more problems than it fixes! $\endgroup$ – Fix.B. May 3 '16 at 3:45
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First we must address the nature of savings. Savings are not bad or good per se. It depends on the context. It is true that in the short run, increased savings will lower consumption, thereby lowering GDP. However savings also increase investment, which in the long run increases economic growth. Therefore, the optimal savings rate is found by solving the trade-off between the short and long-term.

If you are interested only in the short-term (GDP right now and a few periods more) then you would see savings as bad. If you are interested only in the long-term you would see savings as good. If you are interested in both, then it is ambiguous.

The optimal savings rate is certainly not 0 for a standard economy. One way the optimal savings rate is characterized is through the so-called "golden rule" in a simple Solow growth model. You might want to look this up.

Empirically, we typically observe that most countries save too little, i.e. are below the golden rule savings rate. If you are below the optimal rate, whatever that may be, then more savings are good. If you are above it, then more savings are bad. Hence, it is not straightforward to make a case about the desirability of savings.

Your second question was about poverty and savings. Yes, they can and do coexist empirically. In fact, many economists are puzzled why savings rates are so low in poor countries, since more savings increase growth over the long-term.

To see why savings and poverty can coexist, you must think about the reason we have savings. Individuals save more today, so that they can consume more tomorrow. Hence, you cannot really detach the two completely and say that savings are bad. Imagine a poor country that is primarily agricultural, as is often the case. Farmers there make money a few times a year, maybe once or twice, when the crops are sold. However, they must live off this money for the whole year. The only way to make sure you can survive the winter is to save money from crop sales. Furthermore, the poor also need to make big purchases in the future and the only way to do so is to save. E.g. they are poor, but must save up for a wedding, etc. Or they need to buy fertilizer for the next season and the only way to do so is to save enough money. All these things are possible as long as death from starvation is not an imminent threat, which for the majority of poor people today it is not.

Savings do not exclusively occur when all other current consumption needs are totally met, as it seems to be implied in your question. In fact, they can never truly be met, as ressources are scarce. Savings are instead determined by the optimal decision of how much to consume today vs. tomorrow, or how many of my needs to leave unfulfilled today vs. how many unfulfilled tomorrow. Hence the fact that poor people cannot fulfill all their needs today does not imply that they should not save, since they also think about the future and how to fulfill those needs tomorrow. Think of surviving on an island with limited food. You would likely consume a bit everyday and be hungry in order to survive, than eat everything in one day, be full and then die in a few days.

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At the level of an individual household it can be rational for poverty and savings to coexist.

  1. There are degrees of poverty. In terms of food, there is having a somewhat varied and adequate diet but with meat only once a week, there is having a monotonous, entirely vegetarian but adequate diet, and there is going hungry. In terms of education (in a country where there is no free education), there is being able to send all (of 2 or more) children to school, being able to send only 1, or being unable to send any. A family can be poor, but still fear being even poorer in future, making it rational to save. Its 'unmet need' for a more varied diet may carry less weight than its fear of going hungry.
  2. Incomes of poor households, especially in rural areas, are often unstable. Income from a small farm can be vulnerable to drought, pests, or a fall in market prices for its produce. Employment on other people's farms may only be available on a seasonal or irregular basis. If a family member goes to find work in a city, the remittances they send home may be unpredictable. The extra burden of medical costs in the event that a family member falls ill (in a country with no free health service) can also reduce the already low living standard of a poor household. Thus a fear of being even poorer in future can be entirely reasonable.

The aggregation of this sort of situation over many households can explain the coexistence of poverty and saving on a significant scale.

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  • $\begingroup$ While I get your point a vegetarian diet is a bad indicator of poverty. In Western countries vegetarians are more likely to have a college degree and to have chosen the diet because of health/ethical concerns. $\endgroup$ – Giskard May 4 '16 at 11:39
  • $\begingroup$ @denesp I agree. I'm not suggesting that a vegetarian diet necessarily indicates poverty, rather that poverty may force such a diet on people who would like to eat meat if they could afford it. $\endgroup$ – Adam Bailey May 4 '16 at 12:31

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