I read an article by an economist indicating that the U.S. personal savings rate was rising (The U.S. Bureau of Economic Analysis reported that the personal savings rate was estimtated at 2.8% in November) with some off-handed remark that the savings rate was bad because it would mean people would spend less and an economic recovery would take longer. Have we gotten it so backwards that an economist is chiding us for saving money?!?
Earlier this decade, I moved 3 times in 13 months. If you have moved recently, you know there’s always a moment where you go “why the heck did I buy this?” or “wow, I don’t think I wore this once!“. Your life being self-editorialized as nothing more than a collection of things that other people would buy at a garage sale because it becomes junk to you.
What do these two thoughts have in common? If nothing else, Obama becoming President presents a great opportunity to change the course of the last decade but my concern is that too many people believe that an Obama lead stimulus package would be an attempt to steer the country back to the consumption binge of circa 2002-2007 rather than a more balanced approach.
If a stimulus package- and let’s start with the presumption that the primary purpose of most stimulus packages is to restart a stalled economy by encouraging tax payers to spend- is going to result in nothing more than all of us acquiring stuff which will become garage sale fodder when we move then the opportunity has been squandered.
Should not a true stimulus package target parts of the economy that need to be boasted for long term success rather than some short term fix? What do I mean by this?
I am in agreement with Peter Schiff, an economic commentator who called the downturn in 2006, that the true lesson of this downturn is that consumption alone cannot substain any economy. Ultimately, the true engines of economic growth are savings and production. Savings keeps sufficient capital in the system to invest into produtive activities which, in turn, produces jobs.
What does this mean in practicality? If the middle class gets a tax break with the sole intention of sending them out to buy iPod’s how does this solve the uncompetitivness and innovation gap of North American relative to other countries (much less that a tax cut to a middle manager that has been recently laid off really isn’t going to help them)?
But, if small businesses gets a tax holiday if they create new jobs (payroll tax being a hot button issue for most entrepreneurial companies), it may be more useful for people to work productively rather than be soul-less consumers. If these tax holidays were particularly aimed at industries where other countries are now technological leaders, it may make the economy as a whole competitive long term. If employment insurance became skill development programs rather than an insurance program, it would give the chance for the unemployed to broaden skill set.
The point is current policy-makers are putting future generations in hock to the tune of billions and trillions. I am not sure we want to tell future generations that all we have to show for this debt is a lot of neat stuff at a garage sale when a stronger economy could be built.
I am not a policy wonk and I have no idea what governments will do to stimulate the economy. But the thought process that billions of dollars in a stimulus package should be spent so we buy more stuff seems to be nothing more than trying the same solutions again and hoping for a different results.
Have a great weekend.
January 23rd, 2009 at 8:33 am
Hey would be a Keynesian economist. Modern Keynesian economics suggests that consumption is perhaps the most important metric into the health of an economy. A rising savings rate would conceivably hurt the economy further. His point is entirely valid.
However we can argue that overconsumption lead to the current crises. Further evidence of this theory is that for the last few years of good times, we were buying everything on credit. This of course is now hurting the economy.
Students of Keynes, and all economists for that matter, live in a world of holding everything else equal, ceteris paribus. In essence, if we all only bought useful items and invested all savings, the economist would be right. Sadly in the real world you can’t hold all factors equal, so when a Keynesian economist starts talking about a rising savings rate, he looks like an ass.
I’m not a student of Keynes myself. There are two many of them. Like there should be 1 theoretical physicist for every 10 physicists, there seems to be 10 Keynesian economist for every 1 of another type.
January 23rd, 2009 at 8:33 am
He, not hey.
January 23rd, 2009 at 9:45 am
I read Schiffs book as well and agree the American economy is broken. It need a radical paradigm shift from consumer driven economy to an manufacturing/exporting economy. This is how America was built and became a world leader. They seem to have lost their way and it’s not easy to steer a ship the size of the US. Good luck to Obama, but until a shift in thinking occurs and the focus becomes education, innovation and hard work, things will get much worse. Just my 2 cents.
January 23rd, 2009 at 10:35 am
I believe you hit the nail on the head with economist. They assume that people are perfectly rational beings and we are celarly not!
Thanks for the comments.
January 23rd, 2009 at 12:42 pm
Various government interventions may be intended to increase spending, but it sounds like a lot of people have caught on and won’t go for it (it helps that people are losing jobs everywhere and things are a lot more uncertain now).
Give it a few years and all will be forgotten though – with the savings that have built up over that time we can start another bubble.
I would definitely support any policies that reward saving and small businesses instead of spending since that would give me the biggest benefit. But even without any such encouragement I’m not planning to sell my own future that cheaply.