The zombie that Keynes couldn’t kill still stalks the landscape. In a New York Times op-ed today, Conley tells us that the reason we are sliding into a recession is that we save too little, and that only more savings can pull us out.
A few remarks, with Conley in italics:
The recent slowdown in gross domestic product growth is only a symptom of recession, not the cause. While there are many things to blame for the current crisis — most notably the subprime mortgage mess — one factor that has received little attention is America’s low savings rate.
Um, what is the transmission mechanism here? Weren’t people buying subprimes saving too much or in the wrong way relative to their income? This seems to be an argument based on moralism, not economics: we have been bad these past years, spending beyond our means, and now the recession will be our punishment. In the middle ages our sins were punished by earthquakes and plagues, now it’s recessions. At least it’s an ordered universe.
The simplest approach would be to seed universal mutual fund accounts for low-income Americans. The best way to do this would be through a so-called refundable tax credit deposited directly into a special investment account for each taxpayer. In future years, the government could contribute an additional 50 cents for every dollar the taxpayer deposited into this account. Think of it as a universal 401(k), but one that could be used not only for retirement but also for things like a down payment on a house, college expenses or unexpected health costs.
Well this is dandy: in a time of recession we should create new incentives for individuals to salt away more money. Less consumer demand, that’s the ticket. And behind this proposal is the error of thinking that savings creates investment. If the economy is in a nosedive, and businesses are going bust everywhere, who will want to invest?
As I’ve written in this august blog before, our savings shortfall is the consequence of the massive and ongoing trade deficit: we have to borrow to make up the difference between what we earn and what we spend. The problem with the stimulus package, at least one of them, is that it does nothing for expenditure switching.
7 comments:
Maybe we could bring back Christmas Club accounts that I recall making deposits of 25 or 50 cents or even a buck to each week back in the early 1940s. But I don't know if can spare such amounts in my retirement.
Perhaps the availability of student loans inspired youngsters, and their parents, over the years not to save.
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"The recent slowdown in gross domestic product growth is only a symptom of recession, not the cause."
Well, I'm no economist, but I would say it's neither a symptom nor a cause. I was under the impression that a decrease in GDP (not a negative second derivative) is the definition of a recession.
Just linked to this over at Angrybear under Worse Case for Savings Ever? Maybe we might dip into our savings, buy Conley a copy of the General Theory, which of course raises aggregate demand. Conley really needs to read this book!
No need to buy Conley a copy when its free online;he might be scared by the site though.
http://www.marxists.org/reference/subject/economics/keynes/general-theory/
Of course PGL, I now expect you to place a hot link to Capital on the AngyBear site.
Hold on boys and girls. Before you all go ahead skewering Conley for his less tha insightful ideas let's not lose our own bearings regarding the savings issue, recession or not. Who's got money to save after one's meager earnings are taxed out and you've fed your children and paid your mortgage? Savings are for those who have disposable income after paying for bare necessities. Savings don't compete with debt. The two are the antithesis of one another. Savings are the playground of the well fed.
Very true Jack, how can an individual or household save when, in the struggle to prevent complete collapse of living standards, it has nothing to save.
When employment has been made 'flexible', when, for millions, wages have not kept up with prices and when this has been justified by decades of market fundamentalism, there 'might be a problem' that's helped drive consumer indebtedness, so further reduced the potential to save.
Recall though that, for finance, your debt is an asset. So, you say, real economy conditions stand in the way and all this debt can't be serviced. No problema, it's already been securitized and insured, even given a AAA rating by a de facto rating agency monopoly.*
'Investors', govts, private agencies, assorted shills and promoters, in concert and not, do anything/everything possible, and then still more, to perpetuate what is notionally hundreds of trillions of dollars in strictly fictitious capital, and do this even as last instance support in the real decays away, leaving the snake to depend on its own tail. It dies.
*Since the 1970s, largely due to issuer demand for ratings as a way to increase investor confidence, the rating agencies revenues have increasingly been generated by issuers of securities. 8 In the past few years, these revenues have been increasingly driven by ratings for relatively newer structured finance products. As a result rating definitions have undergone significant changes to their meaning as well as the manner in which they are employed. These changes and their implications to the integrity of the rating process are significant.
In an effort to meet market demands for investment grade assets with higher yields, the rating agencies created new models and approaches to rating these assets. Given the limited number of Nationally Recognized Statistical Rating Agencies (NRSROs) and requirements directing certain investors to purchase only “investment grade” rated assets, their move to rate newer asset classes strengthened their market power, 9 or in the words of one rating industry executive, their “partner monopoly”. 10 ... structured-financial products became a major growth opportunity for the ratings industry and has become an increasing proportion of their revenues.
(Mason and Rosner, Where Did the Risk Go? How Misapplied Bond Ratings Cause..., May 2007)
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