Understanding the Paradox of Thrift
Taking a suggestion from DTM, it’s probably worth attempting a layman’s explanation of “the paradox of thrift” in the current situation. So here goes:
I get a paycheck direct deposited into my bank account every two weeks, which is my salary less deductions for taxes and less money diverted into retirement savings. And every month, about as much money comes out of that account—to pay the mortgage, to pay utility bills, to pay credit card bills, and as ATM withdrawals for cash that I spend. I also have coming in a less-regular flow of checks for various freelance assignments I pick up here and there. Those freelance assignments don’t come with taxes deducted, so I always winding up owing money when I do my taxes so I try to make sure I have money saved to pay that off when April comes around. Beyond that, I’m usually saving up some money to take a trip (to Spain, for example) or to buy something somewhat expensive (a new Macbook, for example). But those kind of savings are a pretty small portion of the overall pie. The money I’m not saving for taxes or MacBooks gets spent on goods and services. That spending provides jobs for other people around the world. And those people, in turn, probably spend most of the money they make on other goods and services thus providing more jobs.
So what happens if I decide to cut back and save more, maybe because I want to buy a car or just because I feel a bit nervous and want to build up a cushion? Well, if there’s some particular business that depends crucially on my patronage, that might be bad news for them. But even though the economy as a whole depends on consumers like me spending me, my personal decision to cut back shouldn’t particularly have any macroeconomic impact. And not just because the amount of money is small. It won’t have much impact because if I increase the amount of money I have in my savings account, the bank can increase the amount of money it lends out. And just as my spending led to economic activity and jobs, whatever it is other people borrow money from the bank to do will also generate economic activity.
But now suppose a bunch of people lose their jobs in the construction business and start spending less money. And also a bunch of people in finance lose their jobs and start spending less money. And some restaurants and bars that catered to the finance crowd start having less business so they employ staff for fewer hours and those guys all start spending less money.
Now it’s not just me looking to build a bigger cushion by cutting back on spending, it’s a whole bunch of people looking around and feeling nervous and deciding to cut back. Well, with all that cutting back there’s a lot less stuff flying off the shelves. So retailers start laying off workers (who need to reduce spending and whose friends start feeling nervous and reducing their own spending) and discounting the merchandise. Maybe the sales are so impressive that everyone changes their mind, decides that the bargains are too good to pass up, and goes and buys a bunch of stuff rather than increasing savings. If so, the economy just had a minor hiccup and life goes on. But maybe the accelerating wave of discounts just makes people feel more nervous. And maybe I see all this discounting and decide not to buy that new MacBook after all, because it’s not on sale yet and I’m betting it will be soon.
Now we’ve entered “paradox of thrift” territory. People are saving more. And the increased saving isn’t being cycled back into the economy as new investment. In part, that’s because of problems in the financial system. But in part, it’s because with short-term demand slumping so much, there’s not a lot of worthwhile investing to be doing. The economy needs someone to decide to borrow some money and start a new firm that employs these newly unemployed people. But with the volume of consumption going down so rapidly, nobody’s really in the mood to start a new business. And existing businesses are busy scaling back production, not interested in borrowing money to ramp it up. The result of this is an overall fall in the average level of income. And that means that even with the share of income being saved going up, the actual level of savings can be going down and we can truly end up in the toilet.
The ultimate point of a fiscal stimulus policy is to avoid that toilet scenario. To get money flowing in the economy again, so that savings gets translated into investment which gets translated into jobs which pay salaries which, in turn, are spent and saved in ways that create jobs.
70 Responses to “Understanding the Paradox of Thrift”
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February 8th, 2009 at 10:21 am
Ben Nelson and Susan Collins could soon be the most hated people in America.
February 8th, 2009 at 10:23 am
If you could possibly get the GOP congressfolks to understand this basic idea, would it blunt their opposition to the stimulus bill?
February 8th, 2009 at 10:29 am
Everyone should read today’s piece by Steve Keen on “The Cavaliers of Credit” over at Yves’ blog.
February 8th, 2009 at 10:32 am
No. You can’t refute a theology.
SATSQ.
February 8th, 2009 at 10:34 am
The government needs to spend more in times of economic hardship so that Americans can save more and spend less.
If the government doesn’t do that, then everyone spends less, and there’s no money to pay workers. So you lay off more workers. Who no longer have any money to spend, making the economy work off. Now start off at the top of this paragraph again.
Wash, Rinse, Repeat. That’s what is so god damned frustrating at these trolls and assorted morons. They have to know this, they just don’t care. They hate Democrats so much, they would rather burn the country to the ground then help them save it.
February 8th, 2009 at 10:39 am
Becca, you don’t get it.
They won’t be the most hated people in America. They might get a lot of heat in their home states and possibly lose their own elections if the economy hasn’t improved and by then.
But the person who will become the most hated person in America is likely to be Barak Obama. He is President. He will have failed to solve the most dire problem this country has faced in nearly a century. The Democratic party will have lost the trust of Americans on economic issues. Think really, really hard on what that will mean. The Democratic party will no longer benefit from the perception that they are the ones you trust with economic hardship.
When that light goes on in your head, and you have the epiphany of what that means, then you’ll understand why the Republicans are conservatives in congress are doing this.
February 8th, 2009 at 10:48 am
This is a little off-topic, but in re to the job-loss curves in your graph: I’ve been wondering if the amount and timeliness of information available may be exacerbating the trend. So, if companies know immediately how they’re doing, and can do whatever computer magic to project their future activity, and then act to ‘optimize’ their position going forward … done large, might that be creating an avalanche out of what might in the past have been a slower decline?
Sort of an ‘information panic’?
February 8th, 2009 at 10:49 am
There is indeed widespread misunderstanding of the Paradox of Thrift — even among major left-leaning bloggers who have expressed “doubt about the wisdom of stimulating consumption when we all know that eventually consumption needs to fall.” This is fundamentally wrong-headed.
In a situation like we’re in, the government through expenditures (G) stimulates the LEVEL of consumption (C) to ultimately generate an increase in the LEVEL of investment (I) and spur economic growth (increase GDP). As the economy grows, the LEVEL of C MUST to grow with it, but not necessarily the RATE of consumption — i.e., the propensity to consume (expressed as a % of GDP.) Also, as the economy grows, the portion of C that is “good” (e.g., green) can be increased relative to the portion that is “bad” (e.g., fossil fuels).
Keeping the price tag of the stimulus at $800 billion limits the impact of G (the stimulus) on the LEVEL of C and I — and thus on the RATE of economic growth. That’s why folks like Krugman think it should be much larger.
In addition to failing to understand the Paradox of Thrift, folks who recoil from expanding C through increases in G are treating C + I + G = GDP as only an accounting identity. In other words, they feel that for I or G to increase, C must decrease. WRONG. This is a mistake equally as serious as not understanding the Paradox of Thrift.
For Obama to have had access to folks like Larry Summers for months and not have explained this to Americans — while the debate was hijacked by economically illiterate republicans and Blue Dogs — was a HUGE error in tactics.
February 8th, 2009 at 11:04 am
The “paradox of thrift” is not only for recessions.
Keynes’s Chapter 24 is like a koan for me. What could it mean to effect “the euthenasia of the rentier class?” and make negligible the marginal efficiency of capital?
I think it means the near elimination of “risk” and an economy with almost no savings, investment, rents, or finance.
Capital investment, mostly by the gov’t, would be financed by deficit spending creating taxable income, a temporary democratic adjustment from consumption to investment and back again.
February 8th, 2009 at 11:13 am
one small problem: I don’t see anything in that $800 billion that is going to help me, so why should I start spending money again? If I am employed and don’t need medicare, about $200 billion doesn’t apply. Maybe I get $1000 in tax credits. That is not even a new MacBook. New roads doesn’t make me want to get a new car this year.
February 8th, 2009 at 11:16 am
C + I + G = GDP as only an accounting identity.
Doesn’t it kinda work?
C + G + I = Y, if C & I decrease, G has to increase to maintain Y?
This model is leaving out imports/exports, and one I look at separates I into capital goods and finance(B bonds).
I could have fun if I knew how to use seperscripts here.
February 8th, 2009 at 11:17 am
I assume you work for someone whose product or services must be sold? Or you yourself are selling a product or service that you would like bought? No?
February 8th, 2009 at 11:18 am
I love it when the old, decrepit economic theology gets hauled out. The paradox of thrift was solved long ago, and the only ones who believe in it are those looking to save an economic theory which makes a lot of intuitive sense, but little real sense at all.
February 8th, 2009 at 11:19 am
thanks, m.y.; a good, clear exposition.
so clear, that some might wonder why it’s a “paradox” at all.
short answer: a sovereign nation is not a household.
the “paradox” of thrift only looks paradoxical if you think that whatever is prudent for a household is prudent for a nation, and whatever is reckless for a household is reckless for a nation.
but they are different things. getting that through people’s heads is key to spreading understanding, too.
February 8th, 2009 at 11:24 am
Oh. Incidentally, that employment chart is WRONG.
The January numbers not only do not include birth/death adjustment, but most likely use a ridiculous seasonal adjustment. The BLS first approximation assumed that the last Christmas season followed normal hiring patterns.
There were 3.6 million jobs lost in January, and the assumption was that about 3 million of those were seasonal layoffs. Since it was an unusually low-hiring Xmas, real job loss was more likely 1 to 1.5 million jobs.
February 8th, 2009 at 11:25 am
The paradox is that if people react rationally as individuals by “saving for a rainy day”, they perversely bring about or exacerbate the rainy day.
But in today’s environment consumers really do have to spend less because they are indeed tapped-out. That is why the shortfall in aggregate demand must be made up by pubic expenditures.
February 8th, 2009 at 11:32 am
Your statement is true, but you not treating the equation as an accounting identity. You are assuming (dynamically) that an increase in G could maintain the level of Y in the face of decreases in C and I. This is Keynesian and goes well beyond an accounting identity.
Those who treat the equation as an accounting identity alone would say that, when C and I decrease, Y must decrease also. They would then maintain that increasing G under such circumstances would require C and I to decrease further.
It’s a subtle but important difference.
You’re right that the full model would include (X – M)
February 8th, 2009 at 11:32 am
The Paradox of Thift is an economist’s simplification — and like so much of their work, it leaves out important details.
We did not reach this level of civilization by Consumption –we did it by investing to build capital.
There’s a huge difference between using money to build a new school and to educate children vice pissing the money away on a drunken party — or an unnecessary war in Iraq.
Where Obama is FAILING is in his refusal to tell the American People what the $800 Billion will deliver to them. THAT is what he needs to show.
He needs to point out, for example, that several Billion is going to scientific research to develop new energy sources — instead of following Dick Cheney/George Bush’s approach of wasting $Trillions — and 4200 American lives — to grab new oil reservoirs.
He needs to point out that having TENS of Millions of Americans out of work is just as wasteful as a drunken orgy.
The religious right might be receptive to an argument that we owe our fellow citizens the opportunity to work –to not fall into a life of idleness and crime. He needs to point out that we already imprison a high percentage of our people — 4 TIMES More per capita than China.
Finally, he needs to pound home — time and again — that these EMERGENCY measures would not have been necessary if past Republican Congresses and a Republican President had been doing their job — instead of promoting an Ideology that coddled and enabled massive white collar crime.
February 8th, 2009 at 11:36 am
What the Paradox of Thift does not address is where will you be 2 years latter? While your expenditures have created a sustainable enterprise that delivers high value — a school, road, hospital, computer network — or will your expenditures have funded a drunken revelry which ends with a few bartenders of expert skills and a pack of unemployed drunks?
February 8th, 2009 at 11:39 am
There’s nothing wrong with having a few drunken parties, of course. The prospect of them is a better way to motivate people than the glum prospect of a life of virtue and labor.
February 8th, 2009 at 11:43 am
The Republicans also need to be ripped to shreds on their tax cut arguments. Obama needs to point out the Superrich used much of their 2001 tax cuts to create jobs in CHINA –because they felt they could get a higher rate of return than in hiring American workers.
Of course that works only so long as American Workers pick up the huge externalities of the China trade. Starting with having their Social Security/Medicare assets stolen to suppport a massive global military.
Obama needs to point out that Republican patrons want tax cuts so that they can stuff the money under the mattress and live lives of luxury behind closed doors while outside the poor starve, the sick die for lack of medical care, and children are doomed to poverty due to lack of education.
That the Republicans are supporting the vicious , selfish policy of their patrons: Look out for number one and screw our fellow countrymen.
Oh — and don’t forget to wave the American flag while you’re doing it.
February 8th, 2009 at 11:50 am
At its root the argument between Ds and Rs is about who should do the “stimulus” spending, the government or individual taxpayers, and to a lesser degree the source of deficit financing.
If the ObaBill was simply a trillion in tax cuts and tax rebates with large cuts in entitlement spending then the Rs would be all for it and the Ds all opposed.
But why? After all Matt tells us that all spending is stimulus!
Now the Ds have a lot of stupid arguments for their position but in their hearts they simply don’t trust taxpayers to redistribute our personal wealth the way that Daschle (!) et al. want them too.
And they are right.
Most Americans will not make the personal financial sacrifices of at least 15 K per man woman and child so as to provide the ho down the block with condoms. Or bank shareholders with bailouts for that matter.
The Ds know this.
Thus Obama’s adoption of Bushit “the smoking gun is a mushroom cloud” and “if you vote no the next terrorist attack is your fault” rhetoric flavored with metric free “oh but it would have been so much worse…” bs.
As a result Obama will get the largely David Obey written bill but also ownership of the deepening recession. He knows this and prays that the “stimulus” will improve things a bit in time for the 2010 elections because if they don’t the voters will wise up and Obama will be a one termer facing R majorities in Congress for his last two years.
Which really is why Obama was allowed to win.
Lets make the depression a black man’s fault!
And Matt, just stop getting all scientific on us. Economists like to use words like “theory” and “proof” in an attempt to fool us into believing they practice a science rather than a theology.
February 8th, 2009 at 12:01 pm
Here’s James Hamilton of Econbrowser with a new post on the Paradox of Thrift
Notes:1) JKH is not so lefty
2)I haven’t read it closely yet
3) As I said above, I do consider it important to separate investment into capital investment (K?) and finance (B).
To just increase Savings that are then funneled into derivatives (’B’ for bubbles) or sent overseas will fail. Since I don’t trust the private sector anymore to actually invest in plants or equipment in the States I think the government has to do it, via treasuries or taxes. Forever.
February 8th, 2009 at 12:14 pm
…Hamilton, op cit 24
I am of the opinion that monetary policy fucking sucks at stimulating aggregate demand, at almost all times, and especially during recessions and the zero-limit bound.
Monetary policy stimulates finance, and occasionally the bubblers will let the serfs watch the banquet. This has been the plan for thirty years, and look who Obama has on his economic team.
February 8th, 2009 at 12:38 pm
The best analysis came from Bill Fleckenstein some time ago: “Whatever they do will be wrong.”
February 8th, 2009 at 1:00 pm
Note that you are lapsing into the loanable funds fallacy here:
In ordinary circumstances, if there is a credit worthy borrower ready, willing and able to pay for the privilege, then the bank can free up the reserves to lend by shifting their liabilities … as, for example, when they advertise “attractive rates on Certificates of Deposit”, which have lower required reserves than ordinary savings account, so that when funds shift from ordinary savings accounts to CD’s, reserves are available to support lending.
The idea that the volume of savings constrains the amount of finance available for investment falls apart once you move beyond the crudest Econ 101 model of money creation and have at least two different types of depository accounts with two different required rates of reserve.
The paradox of thrift does not “kick in” under unusual circumstances. The effect is the same whether its a small effort to save by a small number of people or a large effort to save by a large number of people … its just that when its a large number of people trying hard to save, the aggregate impact is large enough to be measurable at the macroeconomic level.
February 8th, 2009 at 2:20 pm
Why would the paradox of thrift always apply?
In an equilibrium situation the decision of one person to consume less while maintaining their current production increases everyone else’s income because the supply of goods increases (i.e., whatever the saver doesn’t consume can go to someone else). Since everyone’s income increases, businesses don’t need to fire people, since even though they are serving one less person, the value of everyone else’s spending increases exactly enough to make up for it.
You get a problem only when lots of people want to save at the same time. The correct response to increased savings is for price-setters to lower their prices, and lower the wages they pay to workers. Neither price-setters nor workers are hurt by this because when savings increase, money for consumption goes further since there is less demand for consumption.
However, in the real world we have price-stickiness and wage-stickiness, which prevents large price reductions on a quick basis, so businesses fire people instead of lowering prices sufficiently. This lowers production which makes everyone poorer. The best response to this is to dilute the value of money to counteract price and wage stickiness, which is exactly what the fed does by lowering interest rates. When this isn’t effective enough, increased spending from debt is necessary to attain the same effect, which is where the paradox of thrift comes into play.
So no, I don’t think the paradox of thrift is always active. It is a result of price/wage stickiness, which comes from an unwillingness or inability of price-setters to respond quickly enough to large economic changes.
February 8th, 2009 at 2:55 pm
Consumption drives the economy — without it, there is no reason to invest.
February 8th, 2009 at 3:00 pm
I think realist is confusing price stickiness effects in individual markets with economy-wide circumstances (which are compounded by the presence of financing arrangements that are not going to adjust with price changes).
In any case, it’s not just the “paradox of thrift” that is mucking things up. It’s that combined with a monetary authority that is out of steam/bullets/metaphors with which to counter contracting demand. In past recessions (usually brought on by the Fed intent on forestalling inflation), the point at which “paradox of thrift” issues begin to develop is the time for monetary authorities to begin loosening interest rates and provide a monetary stimulus that makes saving/foregone consumption less attractive. The Fed has been trying to do this for a couple of years, and interest rates have now gotten to zero. So the problem is not just excessive thriftiness and the paradoxical consequences of such behavior, it’s also the unavailability of the usual countermeasures.
see, for example, http://www.nytimes.com/2008/10/31/opinion/31krugman.html , for what’s probably a better (and more authoritative) account.
February 8th, 2009 at 3:02 pm
I forgot to include the words “liquidity trap” in there somewhere.
February 8th, 2009 at 3:12 pm
But the person who will become the most hated person in America is likely to be Barak Obama. He is President. He will have failed to solve the most dire problem this country has faced in nearly a century. The Democratic party will have lost the trust of Americans on economic issues. Think really, really hard on what that will mean. The Democratic party will no longer benefit from the perception that they are the ones you trust with economic hardship.
How ridiculous. If the problem hasn’t been solved in two years, this country will move more to the left, not to the right.
February 8th, 2009 at 3:13 pm
The Paradox of Thrift lays out what will happen if EVERYONE attempts to save AT THE SAME TIME. It always applies — at full employment or at less than full employment. If all consumers reduce consumption and increase saving, there is no reason for any business to increase investment.
February 8th, 2009 at 3:16 pm
Consumption drives the economy — without it, there is no reason to invest.
I’ll take Oversimplifying the Situation for $500, Alex.
February 8th, 2009 at 3:23 pm
Barbar, how ridiculous that you think you can predict the future.
February 8th, 2009 at 4:19 pm
If all consumers reduce consumption and increase saving, there is no reason for any business to increase investment.
This is true. If everyone increases savings at the same time and at the same rate, nothing will happen at all, absent price/wage stickiness. Decreased spending on consumption will decrease prices for consumption, so the quantity of goods consumed will not change, therefore the quantity of investment can’t change.
I don’t think, however, that that’s the point of the paradox of thrift.
February 8th, 2009 at 5:19 pm
This is an okay overall description of a recession. But it’s a really poor, unfocused discussion of the paradox of thrift. PoT makes a short cameo at the end, but by and large I’d say, ‘Try again, Matt.’
February 8th, 2009 at 5:41 pm
Tax cuts, with same levels of gov’t spending financed by printing money (not borrowing), are the optimal policy.
More is spent, immediately, than by the silly stimulus (how much of IT will be spent in the next 3 months? 20%? 10%? 5%? 1%?). Before the Recession was declared, some 17% of the 2008 tax rebates was spent immediately, with up to 35% spent by the end of the year — more highly targeted than gov’t spending, but NOT ENOUGH to stave off the Credit Default Swap Big Bank meltdown.
Of course, despite the evidence of good effect in 2008, and of the success (BIG success) of the Bush tax cuts, Dems seem to have a religious opposition to letting honest workers keep the wealth they’ve created.
To trust Dems that refuse to be honest & competent with their own taxes or multiple, illegal, rent controlled houses — and think they’ll create ‘good jobs’ for anybody but the big Dem donors is both a huge act of faith, and silly.
But in part, it’s because with short-term demand slumping so much, there’s not a lot of worthwhile investing to be doing.
Nobody knows what the worthwhile investing is. Is it really green cars? Or T. Boone’s windmills? Well, if gov’t subsidizes anything enough, the producers can make money. And spending $100 bil. for windmills worth $50 bil., or green cars worht $50 bil., is only 50% wasted … how much waste is too much?
February 8th, 2009 at 5:46 pm
DTM,
It is true that we produce to consume, but that is hardly the end of the story. The reality of deciding to save rather consume is not the decision to consume less for its own sake, but to restrict present consumption in favor of future consumption. This being so, the increase in saved money lowers the rate of interest, which allows companies to embark on projects which will make the production process more efficient, which will lower costs and therefore prices, and, at the end of that cycle, will allow for the same goods consumption as before at a lower dollar cost. In other words, savings allows for equal or more consumption over time for less money. So, you could say that we produce to consume, but we must save to produce. That was, in a nutshell, the argument which rid the world of the silly theory of the “paradox of thrift” in the first place, though it seems, like an odious phantom, to have made its way back to prominence.
So, basically the oversimplification is not that “produce to consume” is not a reality, but that a restriction of consumption, at least in normal times, is not a decision to consume less goods for the sake of it, but to increase capital in order to consume more goods in the future. Right now that happens to be a dicey situation, so there is some argument that we have something approximating a ‘paradox of thrift’ because currently banks are not loaning, and therefore savings don’t turn into investment, but that is, I would argue, a special case and not related to the overall failed theory of the ‘paradox of thrift’ which would suggest that lowering consumption in favor of savings at any time by society as a whole is a negative.
To think about it another way, macroeconomic theory built without a microeconomic foundation leads to some dicey results, because they attempt to reflect one reality while often their suggestions will contradict the reality of microeconomic theory. It is a problem akin, in some ways, to the difficulty in physics of developing a theory which harmonizes general relativity, and quantum mechanics.
February 8th, 2009 at 5:58 pm
collectively consumers reduce actual consumption, not just dollars of consumption, in an attempt to increase savings. But the resulting reduction in actual consumption means that despite devoting more dollars to saving, they aren’t actually going to be getting more economic benefit from their savings. Rather, each person’s relative share of the future economic pie remains the same, and the future pie is smaller.
It is not possible for consumers to collectively reduce actual consumption, unless investment is increased or productivity is decreased; everything that is produced has to go somewhere. If investment is increased, the future pie is bigger (if everyone stores their apples today they can eat them tomorrow along with everything they collect then). And there is no reason why an increase in savings should lead to a decrease in production, except price/wage stickiness–price-setters aren’t willing to reduce prices sufficiently to accommodate lower demand. So while I agree with everything you said, it’s incomplete unless you include the wage/price stickiness aspect I mentioned in my first post.
February 8th, 2009 at 6:11 pm
February 8th, 2009 at 6:37 pm
Barbar, how ridiculous that you think you can predict the future.
Oh yeah, it’s pretty ridiculous when I think I can predict the future. But if I had just agreed with soullite’s predictions of the future, well that would have been perfectly sensible.
February 8th, 2009 at 6:39 pm
Again, Dumbshit economists have limited brains so they oversimplify things — and miss important details.
For example, there is a time element to investment. If you build a road today, you may have to reduce consumption for a year –to divert resources to building the road. But your investment is repaid a hundredfold over the next hundred years as the road is used.
Most of us do not live primitive subsistance lives — in which we freeze when it is cold, starve in late winters , die from violence or die at age 30 from malnutrition and stress.
That is because our ancestors built up Capital — a highly advanced civilization with mechanical tractors, fuel refineries to run the tractors, fertilizer plants, trucks to haul building supplies,etc.
Liberal arts assholes seem to think this all grows on trees. It doesn’t — it requires hard work. Another concept with which people are unfamilar if their life consists of shuffling paper and constructing bullshit narratives that are never put to the test.
The scary aspect of our situation is not that real personal consumption is falling — it has not so far. It is that investment is falling. See http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&FirstYear=2007&LastYear=2008&Freq=Qtr
(Note: although real personal consumption has not fallen in the last two years, it has been flat. Given population growth of 1 million/year , that mean that PER CAPITA personal comsumption has fallen.)
I have no problem with the US government displacing private investors — since proponents of “free markets” have always been (a) lying shitheads –ignoring the REAL nature of private enterprise in the USA and (b) now publicly discredited as lying shithead –given the massive failure of Republican ideology in the past 8 years.
But Democrats now have a grave responsibility — real leadership is required.
The dumb fucks who say that the US government can’t manage investments are the same draft-dodging shitheads who sleep safe at night because that same government constructed complex, highly advanced military systems to win the COld War.
February 8th, 2009 at 7:44 pm
Ah, I see. You save your money by lending it to the government which then spends it. That way you get to save and spend at the same time. Brilliant! Somewhere, though, it seems to me, the process has to break down.
We’re really not just “trolls and assorted morons”. We think about this stuff, too, and liberals only hurt themselves by assuming we aren’t (or can’t).
February 8th, 2009 at 8:04 pm
Matt,
if the Paradox of Thrift is true, how would a nation ever lift its savings rate?
Wouldn’t there have to be a precisely timed increase in investment, and/or a beautifully coordinated increase in public works spending?
Economies do lift their savings rates over time, so surely it is up to those esposing the PoT theory to explain how this can occur?
If a nation can lift its savings rate and the Paradox of Thrift is true, then surely we have another paradox!
February 8th, 2009 at 9:40 pm
In 1990, civilian employed was 119m; in 2000 137m; in first half of 2008, 146m. So graphing absolute numbers of job losses exaggerates the severity of the current downturn.
Secondly, the current recession has notably higher job losses compared to output losses than previous recessions (see graph here). Presumably this is at least partly a result of much greater uncertainty due to the credit crisis but one wonders if a certain amount of “information panic” is not taking place.
If people are exaggerating the crisis, then that will tend make people more nervous than they need to be, so retreat to cutting spending.
Andrew: regarding raising saving, if incomes are generally increasing, then raising saving will not reduce consumption. If incomes are failing or static, then raising saving will reduce spending.
Increased savings translated into increased investment can lead to increased future income. But there are a few lags there. There are two time-frames: the short term before investment effects kick in and longer-term, after they do. Expectations about both matter.
February 8th, 2009 at 11:48 pm
Right, but when outside consumers aren’t buying as much as they used to, more production goes into inventories or is otherwise consumed by the firm producing the goods or services.
That is to say, investment increases at the expense of consumption (which should have no effect on employment).
And when those firms as consumers also decide to cut their own consumption of what they are producing
What does this mean? Most firms don’t consume what they produce (firms don’t really consume anything).
There is no good reason for a firm to cut back on production of consumption goods just because savings have increased, unless investment also increases, in which case they increase production of investment goods to make up for it. The only reason a recession will happen is price stickiness of some sort, when a firm prefers to fire workers rather than orient to the new economic situation by reducing nominal prices and wages.
February 9th, 2009 at 12:23 am
Deficit spending, whether for tax cuts or government spending, at best means we are borrowing demand from the future. Obviously, this can only go on for so long. While the Keynesian prescription may have an effect on demand in the short run, it completely ignores the long term. Thus Keynes famous statement that in the long run “we are all dead.”
So the question for the Keynesians out there is what about the future? How far into the future are you willing to borrow that demand? We’re $10 trillion in debt now. What do we have to show for it? How selfish are we as a society that we would impoverish future generations just to anesthetize ourselves from the pain of our collective bad decisions? Shouldn’t we pay the price instead of laying it off to the future?
That’s where the two sides part company. Keynesianism is short term relief at the expense of future growth. What do you value more? Relief today or robust growth in the future? Are you willing to sacrifice today to have a much better tomorrow? If not, sign on with the Keynesian crowd. If so, sign up with the classical or Austrian crowd.
That’s what this whole debate is about really. Time. Today or tomorrow? Those who prescribe the Keynesian solution are more worried about today. Whether that makes them selfish or short sighted or whether they just haven’t thought about it, I don’t know.
The real solution is to neither cut taxes nor raise spending. The real answer is to cut spending and balance the budget. And let the recession run it course. Stop borrowing from the future and start living within our means. And no, that isn’t doing nothing. Saving and investing is not doing nothing. It is a rational response to a lack of capital and it is just as rational for a nation as it is for an individual.
February 9th, 2009 at 1:03 am
Right, that is the decision being made on an individual level: less consumption now in favor of more consumption later. But when consumers as a whole start making this same decision simultaneously, they can each get what they are after–deferring more consumption into the future on an individual level–but also at the same time reduce the amount of total goods and services that will be available for their consumption over the entire track.
Sorry, but this is exactly opposite of what is so. If society begins to save more, and interest rates fall, longer, more efficient production processes are embarked upon, and future production grows, not shrinks. Again, you are making two mistakes. First is that changes in consumption habits have no effects outside of the consumer goods market, as in you do not realize the effect they have on the interest rate, and that business believe that an increased level of savings indicates that consumption will be lower in the future. The shift from production of direct consumption goods to capital is what allows the production of more consumer goods, at a lower price, in the future. It is, as somebody said above, what separates advanced economies from developing ones. Goods consumption will not be, even if dollar consumption is.
Realist makes a good point about price stickiness. The fear of letting prices in the economy fall is one of the reasons why increased savings can lead to trouble. However, it is less something that is endemic to market operations, and more something that is a result of the political process.
February 9th, 2009 at 10:10 am
re: Thus Keynes famous statement that in the long run “we are all dead.”
This often used (tiresomely overused?) partial quote from Keynes did not come about as part of Keynes’ response to or thinking about Depression era events. It occurred in the 1923 work, A Tract on Monetary Reform, and the fuller, more interesting and informative (of Keynes’ thinking) goes
But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
If I recall correctly, Keynes was responding to the Classical view that inflation would take care of itself eventually.
February 9th, 2009 at 5:27 pm
What if we are currently just cutting back on over-extended borrowing?
We may need to save more now to simply recapitalize to avoid insolvency (at the personal, corporate, and possibly national levels). Yes, that may lead to a recession, but a recession might be better than the insolvency.
February 11th, 2009 at 10:21 am
Going back a little farther the recessions in the 70s and 80s had a sharper drop jobs and tax cuts got us back to economic growth not massive government spending that will make Japan’s lost decade look good in comparison. Bye the bye if spending is good why is the O dissing the last 8 years? Learn your economic history Y.
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