Saturday, June 27, 2009

Paradox of Thrift or the Ineffectiveness of Tax Cuts?

Jack Healy reports that private consumption isn’t exactly soaring:

Tax cuts from the stimulus package and increases in Social Security checks lifted personal incomes sharply in May, the government reported on Friday, but it appeared that many people were putting that money away instead of spending it. Although personal spending increased slightly last month, the saving rate climbed to its highest level in 15 years as consumers tried to build a buffer against the threat of job losses and more economic hardships. The personal saving rate, which dipped below zero during the housing boom as Americans tapped home equity loans and other easy lines of credit, rose to 6.9 percent in May, the Commerce Department reported. That was its highest point since December 1993.

Pro-growth types often hail a rise in savings as means for generating more investment – but that assumes we are at full employment. Healy knows we are not:

As personal savings return to more normal levels, the increase prompts what economists call the “paradox of thrift.” Although saving money helps individuals repair their finances and pay debts, a sharp rise in overall personal saving can actually deepen a recession and hurt the people who are saving more. As people save money, fewer dollars circulate through shopping malls, Main Street businesses, and large employers and subsequently back to workers through their paychecks. This thrift pulls the economy lower.

Well said – but wasn’t those tax cuts that President Obama included in the stimulus package on the hope of getting bipartisan support supposed to give a boost to consumption demand? It seems that they neither got the Republicans to support his fiscal stimulus nor was a very good bang for the buck form of stimulus.


BruceMcF said...

This seems to be substantially false: "It seems that they neither got the Republicans to support his fiscal stimulus ..."

There was no need for Republican votes in the House, so the number of Republican House votes was empty puppet theater. However, in the Senate, under the anti-democratic institution of the filibuster, there was a need for Republican votes in the Senate, both Republicans in the "R" caucus and Republicans in the "D" caucus, and evidently if those votes had not been forthcoming, the stimulus would not have been passed.

So the answer is, of course the tax cuts were ineffective ... asking whether it is the paradox of thrift or the ineffectiveness of tax cuts is a false dichotomy, since its both ... but without the wasted tax cuts, the needed government spending would not have been forthcoming.

Anonymous said...

Additionally Mr Healy doesn't seem to be writing from the data but rather his recollection of the data that was initally reported. The last 5 years of GDP revisions have all been downward caused by a reduction in consumption. The "savings rate" never went negative and "consumption" includes refinancing my mortgage to a shorter term saving myself hundreds of thousands in interest expense, not just tapped HELOC's. Saving myself all that interest isn't the only form of net-worth improving "consumption" I engage in. I make SS payments, get a 401k match/other corp perquistes.

False dichotomy flavored with unrevised data and a spritz of technical weakness, yum.

Daro said...

Tax cuts are pushing on a string. Giving back money to a wealthy business owner isn't going to induce him to open a new factory and hire people if it won't make him any profit. He's just going to throw a couple of more bricks on his gold pile in the Caymen Islands.

The rubrik that "poor people don't create jobs, rich people do" is patently false. Give a poor person $100 in stimulus and they'll spend $99 of it into the economy with all the multiplier effects associated. THAT will create jobs. The owner of capital as the rich man won't throw a dime out unless he's sure he'll extract more than that in return. Possibly paying a sliver of that money in taxes.

zanon said...

Obama's "tax cut" gave $400 (not a typo) to *some* families. They may not have noticed, and saved it by accident. You cannot blame them for that.

Obama's "stimulus spending" has yet to start. It was too slow, exactly as critics pointed out at the time.

We now have 10% unemployment and rising.

Obama's "stimulus policy" has failed. If he had just declared a payroll tax holiday, we would not be here, but that would not have transfered enough taxpayer money to his banker friends. Goldman Sachs salaries and bonuses have done quite well, thank you.