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Home Publications Blogs Beat the Press "Savings Glut" Means Much of Economics Is WRONG

"Savings Glut" Means Much of Economics Is WRONG

Saturday, 03 August 2013 09:01

This exchange (here, here, and here) between my friend Jared Bernstein and Casey Mulligan is worth a brief comment. As I've told several people who followed it, Mulligan is absolutely presenting the mainstream position in the profession, but Jared is right.

The question, if we ignore silly semantics, is whether the economy typically faces a problem of insufficient demand. In other words, if companies, families, or the government went out and spent $500 billion tomorrow would this boost growth or just cause inflation. (Yes, I used all three interchangeably because if the problem is a lack of demand it doesn't matter who spends the money, the short-term effect on the economy is the same.)

Mulligan presents the orthodoxy, periods where lack of demand is a problem are the exception. As a general rule the economy is at or near full employment. In that context the primary result of more spending is higher inflation as we lack the ability to actually produce more goods and services. In this view, the way we get the economy to grow is by increasing supply side factors, like giving workers more incentive to work, training them better, getting more and better capital, and improving technology. By contrast, Jared is making the argument that if workers had higher wages they would be spending more money, which would lead to more output and possibly more investment as well (yes, a supply side effect).

Mulligan acknowledges that we could be in such a situation now, but that this is an exception. This sort of demand shortfall would not generally be an issue. (There was a similar sort of exchange between Paul Krugman and Joe Stiglitz earlier this year with Krugman taking the Mulligan position. [It is the mainstream position.])

In agreeing with Jared and Stiglitz I would like to introduce the widely discussed "savings glut" from the last decade as a major piece of evidence. While many of the people who knowingly talked about this glut may not know it, a savings glut means a shortfall of demand. In a world with a savings glut the problem is that people are not spending enough money to buy up all the goods and services that the economy is capable of producing.

This means that anyone who believed there was a savings glut in the last decade agrees with Jared and Stiglitz, the economy had a serious problem of inadequate aggregate demand. In this world, if workers get higher pay, this translates into more jobs and higher GDP. (We won't call it "growth" in deference to Mulligan.)

There are some other propositions that would follow from the savings glut as well. In this world government deficits are helpful to the economy. They boost demand. That's bad news for the folks who want to say the Bush tax cuts wreck the economy. (No, I have not become a fan of giving money to rich people, but no one pays me to shill for the Democrats.)

The basic economic problem becomes how to find ways to either increase demand on a sustained basis or adjust to a situation in which we will maintain a lower level of output without hurting people with inadequate incomes. (Can anyone say reduced workweeks and longer vacations?)

Anyhow, this is about the most fundamental point that we can have in economics. It is amazing how much confusion exists on the topic.



I see from the comments that this note has prompted confusion. Let me clarify a couple of points. My comment about the Bush tax cuts was not an endorsement of the tax cuts, I was just making the point that the deficits they created did not hurt the economy. We needed the demand and if we didn't get them from the tax cuts, then we would have seen slower growth and higher unemployment. It would have been better both from the standpoint of boosting demand and reducing inequality if the tax cuts were focused on low and middle income people. It would have been even better if the money was used to support education and infrastructure, but the deficits themselves were good news, not bad news.

As far the existence of a savings glut, this is usually discussed in a worldwide context. The argument is that the world has more savings than it knows what to do with. The U.S. has run large balance of trade deficits over the last 15 years, which means that we have been taking some of savings generated elsewhere in the world. This would leave people unemployed in the United States, since incomes generated in production are being spent overseas. The counter to this has been the stock bubble in the 1990s and the housing bubble in the 2000s, both of which prompted large amounts of consumption, and therefore low household savings.

So this picture is totally consistent with a story of savings glut. What would be inconsistent is if we saw low savings rates even when trade was near balanced or in surplus. That has not happened. 

In any case, the immediate issue here is simply the concept of a savings glut. It means that our problem is inadequate demand. Many people who talk of a savings glut do not seem to realize this fact.

Comments (22)Add Comment
written by Richard, August 03, 2013 9:30
When the bulk of the jobs being 'created' are part-time, minimum wage, there are little savings available and ALL the income is spent on the very basic act of staying alive. There's nothing available for things that can be remotely considered as extras, thus no consumer demand

(I make this statement from personal experience - unfortunately for me)
written by foosion, August 03, 2013 9:54
The [Bush tax cuts] boost demand. That's bad news for the folks who want to say the Bush tax cuts wreck the economy.

They wouldn't be bad if we had a better government. Alas, we have one easily gripped by deficit hysteria. The Bush tax cuts do much less to boost demand than alternatives, such as more spending or a payroll tax cut (those making over $250,000 likely save much of their tax cuts, those who are poor and cash constrained likely spend just about all of it). Given the political constraints, the Bush tax cuts hurt.
written by Peter K., August 03, 2013 9:59
I find it confusing b/c of the credit channel. Credit obviously is how some demand is recycled from the rich back to the rest of us.

written by Stephanie Kelton, August 03, 2013 10:09
Hi Dean,

Saving is just another way of saying "demand leakage". Only those with a loanable funds/Say's Law view of the world see it as anything else. Unfortunately, Krugman appears to be stuck in the latter camp. He gets insufficient AD only under exceptional (short-run) conditions, currently his zero lower bound Liquidity Trap argument. This is why he can write a piece titled "The Price is Wrong" and assert that the lack of insufficient aggregate demand is due to the failure of a single price -- the real interest rate -- to adjust to its market clearing level.

Absent the ZLB problem, you end up in a Say's Law world, which Krugman is committed to defending:

"So why do AS-AD? First, you do want a quick introduction to the notion that supply shocks and demand shocks are different, that 1979-80 and 2008-2009 are different kinds of slump, and AS-AD gets you to that notion in a quick and dirty, back of the envelope way.

Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility."

historical case study
written by Peter K., August 03, 2013 10:30

"Economic growth begins with investment and ends with consumer spending. Not the other way around. To the degree that policy makers are confused on this point, it should be no surprise that they are delivering low economic growth rates."

My view is that Mulligan's side has been in the driver seat for the last 30 years and have delivered low growth rates and rising inequality. It's feature not a bug.
Don't understand the reasoning
written by Curious noneconomist, August 03, 2013 11:15
I don't understand this reasoning, can you explain?

"While many of the people who knowingly talked about this glut may not know it, a savings glut means a shortfall of demand. In a world with a savings glut the problem is that people are not spending enough money to buy up all the goods and services that the economy is capable of producing."
written by AlanInAZ, August 03, 2013 1:06
or adjust to a situation in which we will maintain a lower level of output without hurting people with inadequate incomes.

I think this is the long run key issue. Just imagine how much damage we will do to the environment and climate if everyone on this planet consumed as Americans do. The shape of our economic system must change. We must also devise a better method of measuring economic progress that includes the full societal impact and use those metrics to guide policy.
Krugman still believes that the economy tends to full employment
written by Dean, August 03, 2013 1:52

i think you're right that Krugman considers the current downturn an exception because of the ZLB. In more normal times he would say that we can count on declines in the interest rate to move the economy quickly (fast enough not to need fiscal policy) to full employment.
To follow up on AlanInAz
written by John Wright, August 03, 2013 2:58
Relative to the "need more growth" argument, slower growth, producing lower accumulated CO2, gives the world more time to ameliorate/compensate for the on-going climate change issues.

Perhaps economics and economists, in general, are guilty of "head in sand" GDP accounting as current economic growth may be building up a huge future cost in environmental damage that is not factored into the developed nations economies.

If true, this argues for shrinking world economies, different output incentives and more equitable sharing of the economic pie.

But this is not something a politician or politically connected economist may want to advocate.

Technology MAY save the day, but some proposed technical solutions have proven elusive, such as hydrogen fusion.

written by skeptonomist, August 03, 2013 3:03
As far as it goes, this discussion ignores distributional and incentive effects - why? Dean gives great attention to distribution in other contexts. How could it be irrelevant who gets the tax cuts and does the saving?

Regarding the ZLB, was that the problem in the recession of 2001? Was there a liquidity trap then? Recovery was very slow then as well until the housing bubble took off - Krugman just ascribed the slowness to "post-modernism". Krugman's (and DeLong's and..) position that interest rate changes are sufficient "normally" to keep the economy near full output is just dogma, not supported by any direct evidence. It was not the position of Keynes - he thought that fiscal management would probably be necessary. See the end of Ch. 2 of The General Theory.
Define "Savings Glut" please?
written by Lrellok, August 03, 2013 3:06
who are you and what have you don with dean baker?


This is YOUR GRAPH, clearly showing we have not had anything vaguely resembling a rise in national savings rates since the late 90's. Though out 2000 - 2010 (the last decade) there where historically low savings rates, which makes sense since we where in a consumption bubble fueled by shaky lending practices.

I fully concur that wages must increase, but not because of increased demand (though that would be nice too) but because, as you say, "giving workers more incentive to work". The problem we are having is a "Labor Glut" beginning in the early 70's, which has distorted wages below equilibrium. Social norms say people are expected to work, which creates a "Quantity Floor" preventing the supply of labor from correcting down as wages fall. Increasing wages would return the market to optimal equilibrium, forcing investors to use capital efficiently instead of squandering it on things like the Facebook IPO.

But all this is beside the point. Dean Baker has already acknowledged that nothing resembling a "Savings Glut" exists. So who are you, and what have you done with professor Baker?
written by skeptonomist, August 03, 2013 3:16
Insofar as the Bush tax cuts went to people who were likely to spend the extra money they got they were stimulative. But of course they mostly went to rich people who had plenty already and demand was not increased much. Deficits were increased to little purpose and wealth was distributed upwards. Then in the next recession the size of deficits and national debt tended to cause unwarranted panic.
Eccentric Fools, Productivity and Growth
written by Last Mover, August 03, 2013 4:27

One might think that more demand in the short run would have much more to do with increases in productivity and growth than efforts made from the supply side, by using otherwise idle resources with low incremental cost.

But from the third link above on Mulligan and Bernstein is this from Mulligan:
Only an eccentric fool would be startled to learn that in fact Barro and Sala-i-Martin find that they should cover the topic of economic growth without even mentioning Keynesian stimulus. Don’t be startled that the three other books don’t include Keynesian stimulus either, let alone treat Keynesian stimulus as “standard issue.”

The reality is that economic growth theory treats Keynesian stimulus about the same as it treats U.F.O.’s: they are not considered to be an important part of what creates sustained growth for nations (see also my previous list of growth policies from Aghion and Howitt’s economic growth book, and the notable absence of any kind of policy to promote short run consumption).

So closing a trillion dollar output gap that opened up 5 years ago is not important to growth and productivity and anyone who says it is, is an eccentric fool.

Just keep repeating Says Law. Investment from the supply side must come first so it can create consumption from the demand side.

Uh huh. No better way to avoid getting labeled as an eccentric fool is there.
Savings glut ?
written by Jim, August 03, 2013 6:38
So if we had a weaker dollar, and a lower trade deficit, would the savings glut decrease on a 1:1 ratio with a decrease in the trade deficit? I saw the petroleum gap was down some 12% through the same period as last year. But oil and gas jobs are up less than 2 % yoy and make up 15 basis points of the workforce. So I guess you would need the trade gap to narrow in sectors that are more labor intensive..
written by Chmyankel, August 03, 2013 8:51
In the parenthetical at the end of your third paragraph, you say, "yes, a supply side effect." I think you mean "yes, a demand-side effect."
chmyankelll...no...supply side is correct, but weird
written by pete, August 03, 2013 10:14
It it investment that creates supply. There is a circularity here regarding who starts what when. The above argument is that if workers only (magically, think tinkerbell and fairy dust) had more money they would buy more stuff (demand) and so companies would hire more workers and have to invest more and produce more (supply).

This is compared to say reducing corporate taxes or offering investment incentives, which then creates investments so that firms want to produce more (supply) and hire more workers and workers have more money (demand). Thats kind of the traditional "supply side" idea.

What has happened of late is large deficit spending, traditional demand management stuff. Unfortunately, these large deficits have not created the demand expected, even with the Fed buying 90% of them to alleviate any potential crowding out. So the mystery really is that in spite of now many years of large deficits, there has not been the comensurate increase in employment.
creating demand
written by danny, August 04, 2013 2:41
There is not enough demand because people do not have enough money. People do not have enough money because money is created when banks lend and lending is down.

Therefore in order to fix this problem we need to modify the fed so that money policy isn't dependent on banks and the fed deals directly with the public. If the banks are bypassed they cant block monetary stimulus or misdirect it towards unproductive or speculative enterprises. cmamonetary.org
written by skeptonomist, August 04, 2013 9:44
I still haven't figured out how Dean's arguments about a savings glut bear on the question of whether wealth distribution affects economic growth, which was what Stiglitz, Bernstein, Mulligan and Krugman were talking about. The position which seems to be taken by Krugman as well as Mulligan that it has no effect seems very dubious on both theoretical and empirical grounds apart from savings (however that bears). As wealth is distributed upwards the economy tends toward feudalism, with all the purchasing power in the hands of a few - if those few have all the money, why would they invest to try to get more out of the peasants, who have none? The peasants have no power to save. Feudal economies were not noted for growth.

It's too bad that there is apparently no breakdown of savings by income level. This is hardly irrelevant.
written by skeptonomist, August 04, 2013 10:12
Modern economies are based on mass consumption. That is they are based on iPads, not yachts (despite what Krugman may think). Bill Gates can only use so many iPads (if he was inclined to buy any), so the 99% have to have some money to keep the economy going. You can say things start with investment (as you can say things start with the chicken instead of the egg), but capitalists don't invest to pay workers, they invest to try to get money out of workers. In the real world investment doesn't happen without demand.
Inequality was high in the 1920s
written by pete, August 04, 2013 10:26
Essentially, at the "end" of the industrial revolution, we had big inequality. Then that got dispersed, peak equality in 1968. Then we had a dotcom revolution. All these silicon valley folks became wealthy overnight. And now, that too will be dispersed. Simple cycle situation. Probably larger government and activist monetary policy opened up some room for rent seeking too, but this is dwarfed by the dot com boom. Could have avoided the marginal effect of big government, but there are too many idealists who think government somehow does only good things.....
written by KnotRP, August 05, 2013 3:16
> In other words, if companies, families, or
> the government went out spent $500 billion
> tomorrow would this boost growth or just
> cause inflation.

In the US? Neither. Either way, US workers are
on an unavoidable trip to globalized labor standards,
which are quite low. What we have here is a total
failure to appreciate the situation we are in.

> In any case, the immediate issue here is simply the
> concept of a savings glut. It means that our
> problem is inadequate demand.

Demand arises from stable or growing wage income
amongst the majority of US consumer class. Declining
unstable wage income and rising real costs (energy being
the most obvious example) shrink consumption plans.

Is it really that hard to recognize when a Developed
economy is stuck in a large scale long term wholesale
shrinkage of activity (developed world income->demand->supply->developed world income loop).
Injecting money into developing world wages does not
stop the developed world doom loop.
written by http://www.republicamor.com/blog.php?user=bradpitt123&blogentry_id=111339, August 05, 2013 10:44

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.