Turner Turns (6) Inequality

Like everyone these days, Adair Turner is concerned is about inequality.

Within any society, richer people have a higher propensity to save. If there is a dramatic increase in inequality, there can be a situation where intended savings are not matched by investment decision. This would normally create a deflationary impetus, except that rich put their money in the bank, and they lent it out subprime mortgages to people trying to make up for deficiencies of income.

Inequality will have to be eliminated to prevent this problem.

His concern about inequality comes from a Keynsian dislike of saving. I am concerned about inequality too, but saving is not the problem. Saving is essential for supporting capital formation. Without capital funded by real saving an economy cannot grow. If savers want to save more than entrepreneurs want to invest, interest rates will fall (provided central banks are not meddling) and more capital projects will be viable and the excess savings will be absorbed. So excess saving is not a serious problem. While poverty is a problem, it is foolish to say that there is too much saving.