The Value of Savings

Riffing off my response to Chait, Free Exchange's Washington-based blogger writes:

Suppose you made a million dollars and you put all but $50,000 of it in a shoebox. Now suppose that you never lose the box, never spend it, and leave it all to the dog when you die. What good did the $950,000 do you? If one derives pleasure from imagining consumption possibilities but never actually consumes anything, does that count as value derived from consumption? What if the wealth is public knowledge, and it generates an attitude of deference among those who respect the wealthy or hope to profit from association with them? What about the value of security? Does the presence of a large, cash barrier between you and financial disaster count as a gain derived from consumption (given that the barrier represents the ability to consume post-disaster)?

I don't mean this as any kind of criticism of Mr Wilkinson, I'm just wondering to what extent it is true. How much do people enjoy having money just because they enjoy having money?

I've been thinking about this a good deal. One way to look at savings, as Free Exchange suggests, is to see it as just another kind of consumption. This would help make sense of misers who compulsively hoard. When you get a dollar, you can exchange it for something else to consume or keep it and consume the utility of having a dollar over and over and over. I suppose one might say that differences in savings at the same level of income reveals a difference in time preference or risk aversion or estimates of lifetime income or money fetishism or a mix of these. (How hard is it to tell which it is?)

I think all this makes sense, but it's not very helpful. You can't eat dollars, live in them, get an education or much entertainment from them, etc. I think the insurance value of savings is really significant. How do we estimate it? Measure the difference in concentration of stress hormones at different savings levels? I also thing that the status value of savings can be significant, too. But this seems likely to be lower than the status value of effectively signaling wealth, which is just as likely to correspond to huge debt.

I'd guess there's a great deal of variety in peoples' attitudes toward savings and debt. Both sides of the ledger are morally valenced for many people. I'm a weirdo who reads too much economics, so I see my accumulated human capital as serving much of the insurance function of money savings. So, despite the fact that I remain a net debtor in money terms (student loans!), I feel well in the black. Some people are ashamed of debt, because it's debt, and hasten to wipe it out. Others act like credit is free money and run up debt until it explodes in their face. Then they go bankrupt. And then, later, they do it again. Some Spockish types will make minimum payments on debt indefinitely, as long as the interest rate on the debt is lower than the interest rate on investment or the value of present consumption. Some people require a cushion of savings for minimal peace of mind. Others are happy as long as their checking account doesn't dip below zero before the next paycheck. Etc. So I think it's probably hard to draw a really useful generalization about the intrinsic utility and disutility of savings and debt.

Since it remains that most savings is intended to finance future consumption (my account with the largest positive balance is a 401K retirement savings account, and I'd bet that's pretty typical), it seems best to keep the concepts of savings and consumption separate for analytical purposes — even if some of the value flows of savings seems a bit like the value of consumption; even if some forms of consumption have, in addition to the direct value of consumption to the consumer, savings-like value. Here I'm thinking of money spent improving a skill that is fun but pays, or money spent on capital goods that are also a source of enjoyment, like my computer here, or money spent on assembling a meaningful collection that appreciates in real market value. It's complicated! I think it's enough to say that the value of consumption isn't the only source of value in life, and that the value of consumption isn't even the only source of economic value in life. Nevertheless, real lifetime consumption remains far and away the best proxy for lifetime economic welfare.