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.