In other words, the level of investment determines the level of saving and not the other way around (Michl 2002, p.43). The point has been argued for the next 70 years and both theories have at times fallen in and out of favour.
Thomas Palley of the AFL-CIO wrote in a 1996 paper that, "The view that saving causes investment is widely identified with classical macroeconomics, while the view that investment causes saving is widely identified with Keynesian macroeconomics. However, deeper inspection reveals that both theoretical perspectives are capable of producing bidirectional causality, and this limits the usefulness of theory for resolving this crucial matter" (p.5). Supply side economics has run headlong into the demand side theories and have resulted in numerous, and yet valid, academic arguments on both sides. According to theory, "...saving can never be different from intended investment, in equilibrium" (McCain 2007). The Paradox of Thrift is one explanation, though not the only one, of how savings can influence an economy's production and increase the unemployment rate.
Supply side economics maintains that the marginal tax rate, the rate at which the next dollar earned is taxed, directly influences people's propensity to wo ...Show more