Chapter 13

Chapter 13 is titled “saving, investment, and the financial system” and introduces the financial institutions in the US economy, which consists of financial markets, such as bonds and stocks, and financial intermediaries, such as banks and mutual funds. It also discusses saving and investment in the national income accounts and the market for loaning funds and its three policies, saving incentives, investment incentives, and government budget deficits and surpluses.

Private saving is the amount that households have left after paying for taxes and consumption. Saving is made up of private and public saving and equals investment, therefore a change in private saving would change the amount that investment must be. It is important for individuals to save in an economy because saving is a long-run determinant of a nation’s productivity, which would mean more resources would be available or capital accumulation, GDP would grow more rapidly and eventually citizens would enjoy a higher standard of living. Public policies, such as tax policies, negatively affect savings rates because people are discouraged to save since their income is taxed. If there was reform of the tax laws, as policy 1: saving incentives, states of the market for loaning funds, this would encourage greater savings and as a result there would be lower interest rates and greater investment. Government budget deficits means there is an excess in spending over tax revenue, and causes interest rates and investment to fall because it reduces national saving.

Crowding out is a decrease in investment that results from government borrowing. In an article titled “Trump tax cuts: a little good old-fashioned crowding out,” the author, Dean Baker, a senior economist at the Center for Economic and Policy Research, expresses how big of a problem really is. He explains how this leads to increased interest rates which reduces demand in interest sensitive sectors and makes US goods less competitive internationally, which leads to a larger trade deficit and also reduces demand. This article shows that the biggest challenge is finding a way to reverse and to prevent crowding out. While keeping interest rates low would be preferable, and would reduce unemployment, this could result in very high inflation. The article focuses mostly on housing and the effect that crowding out has on it, that homes are not affordable anymore due to high mortgage interest rates or because they decide to pay more that they have less money to invest or spend on other things. Especially after reading this article I find crowding out to be a big problem because of the result it has on so many sectors of the economy and even other economies in the world that can cause permanent damage.