Monday, January 12, 2009

Hassett and the Paradox of Thrift

I nominate Kevin Hassett for the worse argument yet against the Obama fiscal stimulus:

We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money.

Financial institutions lend money to those who wish to invest more than they save. Our current problem is not that there is too much private investment – rather it is that there is too little private investment. OK, financial institutions may have made certain loans that defaulted – to which they are now lending less. But that is not the same thing as “financial institutions borrowing too much money”.

As Keynes noted – when the private sector invests less than it saves, an insufficiency of aggregate demand may lead to a recession unless the public sector decides to engage in fiscal stimulus. Yet, Hassert is advocating fiscal restraint which would further increase the national savings schedule leading to the well known paradox of thrift. Herbert Hoover would be proud!

On top of this silliness, we get:

How could the deficit increase so much, so fast? Part of the story is the decline in revenue, which the CBO forecasts will be $166 billion less than it was in 2008, a 6.6 percent decline. But relative to 2000, revenue has actually increased from $2 trillion to a scheduled $2.4 trillion in 2009. The deficit has skyrocketed because spending has grown from $1.8 trillion in 2000 to a projected $3.5 trillion in 2009, fully 95 percent higher. Of course, all that happened mostly on a Republican watch.

Nominal revenues will have risen by 20%! Wow! Oh wait – the price-level will have risen by about 25% so real revenues will have declined even in absolute terms. Real revenues per capita or revenues as a percent of GDP – you know the drill! While it may be true that Federal spending relative to GDP increased during the Bush Administration – any suggestion that real Federal spending per capita doubled would be laughable in the extreme.


Anonymous said...

I am not an economist so perhaps my thinking is a little simplistic, but remember the Greenback party. They wanted to print more dollars...i.e. create inflation to make the current dept load of over mortgaged farmers easier to pay back.
I don't remember quite who but I remember that same solution proposed for Japan in the late '90's. It seemed to make sense then too.
I know inflation is a problem too but at least we have some experience fighting that.

TheTrucker said...

When you add the $700B needed to bail out the Republican housing bubble to the money spent on the Republican fiasco in Iraq and the Republican War on Terror (think Homeland Security), you will have a very large whopper of spending with very little tax revenue generated. This is primarily because of tax cuts. Only lying thieves cut taxes and march off to war at the same time.

If 2000 was 1.8 and the .25 is as you say then the 2009 budget would be 2.25 trillion without all the bogger man spending and bubble pumping of the Republicans. So they will have spent 1.25 trillion on their manipulations and they have insufficient tax proceeds to show for all that spending. Add to this the recession they created for the incoming Democrats and you have the numbers as you see them.

Of course the Republicans will claim all that dough was sent to the welfare queens in Harlem, but what can you expect from Republicans.

As anonymous says above. The stimulus is the right stuff. It will need to be even bigger and it will need to induce inflation. Import duties are also in order as well as carbon taxes. All of the spending and the consumption taxes will create inflation. But that is what is needed.

The Wall Street Ranter said...

You are missing a key point. There is NOT too little private investment. You just think so because there was TOO MUCH private investments before. Therefore trying to encourage private investments at this time will end in failure. What do you want people to borrow for? Do we need more houses? Do we need more WalMarts? Do we need more Starbucks? Do we need more dollar stores? Do we need more Best Buys? Do we need more CARS? More cell phones? more TVs? The more you push people to borrow money the more DEFAULTS you will get because there is TOO MUCH supply of everything. Everytime someone borrows to start a business to supply one of these needs, someone else will make less money. Ok so you say build infrastucture. Good then what? Besides these are all for "Shovel-Ready" projects. All you are doing is borrowing from future production...not creating new projects. Essentially what happened is the private sector hit its tipping point for debt so the government will spend until it hits its tipping point.....Then we all fall down.

ProGrowthLiberal said...

AJ - if you think that the amount of private investment is just right - fine. Then we face underconsumption. In either case, the Keynesian argument about the Paradox of Thrift still holds.

Unknown said...

Arguing that financial institutions didn't borrow is a brazen balderdash. These institutions were leveraged to the hilt, some of them to ratios of 30-1.

In order to have the paradox of savings, you have to have the situation of money saved not being invested. Considering this country had a negative savings rate, there was nothing left to invest, which is why America did not invest in itself. The fact that we didn't invest in ourselves has a lot to do with where we are at right now, right?

Of course, this economic stimulus that Bush started in the billions and Obama intends to snowball into the trillions is only different from a centrally planned economy by difference of degree. We all know how successful centrally planned economies are, don't we?

Look at the results so far. GM can't make money for over a decade, so give them a subsidy to the tune of $10,000 per car.

If you want to encourage economic growth, then you need to allocate capital to most efficient uses. The government is incapable of determining what's efficient, price signals accomplish that and the stimulus that will be enacted will only interfere with these signals...i.e., ensuring capital will be continue to be misallocated and ensuring our net wealth will continue to decrease.

Mark A. Sadowski said...

Kevin Hassett is a senior fellow at the American Enterprise Institute, was an economic adviser to Bush and McCain and is the coauthor of "Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market" published in 1999. Enough said.

ProGrowthLiberal said...

"Arguing that financial institutions didn't borrow is a brazen balderdash." David? Financial institutions are financial intermediaries. Yes - our deposits are their liabilities but their assets are loans to corporations and households. They facilitate the borrowers of those who invest more than they save (yes - some folks do save) by issuing loans. But that is a different matter from what most of us consider borrowing.

Anonymous said...

Isn't Hasset the bafoon that wrote the book Dow 36,000? Enough said.

TheTrucker said...

I do not know what the "paradox of thrift" might be. But it smells like a gold bug problem that claims there is some limit to the amount of money. It actually seems like Fisher as opposed to Keynes. But there isn't any such limit. The only limits are land and labor. And we have a huge abundance of both here in the USA.

In reality "crowding out" has to do with labor allocations only. Money is created on a keyboard at the Fed. The word "labor" includes talent and ingenuity and skill. The Sandwichman is absolutely correct in his "share the work" initiatives. We have more labor than we know what to do with. Our problem is an entrenched aristocracy that covets control above all else.

But do not, therefore, believe that I am a windmill freak. Alternative energy should include an immense national effort directed at portable small scale thorium reactors. We can paint em green. These rigs are built in the reactor factory, then loaded and hauled to the "power plant" site. The stuff cannot be used for weapons and the USA would be the prime producer. Any grunt can make cars and windmills. The real innovators must innovate.

There will not be a lot of jobs in the reactor factory. The Muslims found a way for the aristocracy to control the masses without the problem of employment and production. What are they going to do with all these Americans.