This is actually a very subtle issue, because at first blush you’d think the Austrians (adherents to Say’s Law-type reasoning in general) would say that savings always equals investment, whereas those wacky Keynesians would think the two could be different. Yet actually, it is Keynes who insists in the GT that savings necessarily equals investment, and he criticizes the Austrians (as well as other “classicals”) for thinking that “real savings” might fall short of investment spurred on by an artificial boom.
Anyway, that’s sort of a separate thing. Look at Krugman today. Because Obama said foreigners would be more willing to invest in the US if they thought our long-term budget situation were under control, Krugman wrote:
Think about it: U.S. interest rates are low; there’s no crowding out going on; we are NOT suffering from a shortage of saving.
So if foreign investors decide they love us, what does it do? It drives up the value of the dollar, which reduces exports, which leads to fewer jobs.
Does this sound familiar? It’s closely related to the reasons Chinese accumulation of dollar reserves unambiguously hurts the US economy when we’re in a liquidity trap. And what we just learned is that the White House still doesn’t get it.
So hang on a second. I thought–per Daniel Kuehn, but I think he is right–that the problem isn’t too much savings per se, it is not enough investment. So what’s going on in Krugman’s analysis? Obama is saying that both American and foreign investors will be more willing to plunk down investment spending in the US if they are reassured about the fiscal situation.
So why would that make things worse? Take it one step further: Suppose a Japanese investor literally bought US concrete and hired currently unemployed Americans to start building a factory in South Carolina. In order to do this, the Japanese investor would need to use his yen to acquire dollars, in order to buy the American real estate, to buy the concrete, and to hire the workers. So that would push up the dollar versus the yen, and hurt exports, meaning the Japanese investor was hurting the US economy?