"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.