Tuesday, September 27, 2011

How could higher savings be bad?

Paul Krugman puts the pipsqueak stimulus in context:

[C]onsumers suddenly increased their savings. ...

[Y]ou have a negative shock on the order of 6 percent of GDP.

Against this you had a stimulus bill of $800 billion — except $100 billion of that was AMT extension that was going to happen anyway, another $200 billion was other tax cuts of dubious effectiveness, so you were left with $500 billion of spending, spread over more than 2 years — maybe 1.5 percent of GDP or less.

It just wasn’t big enough to do the job.
The $1.5 trillion stimulus package - the one that Larry Summers refused even to present to President Obama - and it's Obama's fault for appointing Summers, whose foremost attribute is undeserved arrogance (though he thinks it's brilliance) - would have filled 75% of the demand gap. We wouldn't have 9% unemployment if Obama had taken this case to the people:
  • It's free to borrow money.
  • The best way out of recession is to grow.
  • We're going to build useful infrastructure that we and our children will benefit from for the next 30 to 60 years.
  • This will heal unemployment, which will take much of the pain - and there will be some pain - out of repaying the debt.
The estimable professor forgets to explain why higher savings in face of a recession could possibly be bad. People are tightening their belts in the face of hard times. Rational, careful, conservative (in the good sense).

The paradox of thrift is the textbook example of the fallacy of composition in Keynesian economics. Behavior that's good for an individual or a family makes a recession worse. Money that's saved - not because people suddenly became virtuous but because they are fearful about the future - is money that's not spent. Since it's not spent, businesses have to contract their economic activity. They may be sitting on big profits (sound familiar?), but there's no reason at all for them to build more capacity, much less to hire unemployed workers.

Only the government, acting on behalf of all of us, can break this vicious cycle with deficit spending. And again, borrowing money is as close to free as it has ever been in history.


flymorgue2 said...

Gee, it's divided by GDP in the graph. wouldn't the collapse of Obama's economy cause such a spike? Best not to think about it, Maddow is almost on and It's only damn statistics, anyway. Don't savings become invested? That's what I learned in 'It's a Wonderful Life'. Can you imagine the great video that the Repukes could loop of Obama asking everyone to blow their savings on the heels of his own trillion dollar ejaculation? I wish you would give him more advice like that - I really did not expect that he could get worse, but I is wrong about a lot of things.

lovable liberal said...

If you would limit yourself to comments that make sense, you'd have nothing to say.

The problem, [gratuitous insult self-censored here], is a demand gap, and it's self-reinforcing. I'd call it a positive feedback loop, but you'd misunderstand that.

flymorgue2 said...

Self censoring? I just inserted it in my mind, so fail on that.

The GDP was negative during that period. Might affect this measure of 'savings'. No matter, I have investeed in alien defenses and hole digging/filling operations at Krugco and associates, former advisers to Enron.

lovable liberal said...

GDP was shrinking, not negative. Which makes an increase in savings all the more damaging to the economy.

Corporations are sitting on piles of cash. There's no dearth of investment. What's missing is consumer demand.

You have not the slightest clue about macroeconomics.

lovable liberal said...

... which makes you a perfect consumer of Republican and libertarian bullshit.

flymorgue2 said...

Piles of cash? Sounds like time to tax it? How'd that work out for FDR? savings does not sit under Pa Kettle's bed - it's "in your house, and his house" according to Jimmy Stewart. Now stay lovable during this economic implosion brought on by the implementation of all you espouse.

lovable liberal said...

You really have no idea what I'm talking about, do you? I'm not talking about savings, I'm talking about profits. Record profits haven't led to the investment or hiring that conservative idiots promise. They just demand more upward redistribution of wealth and income. Republican economics not only failed in causing this crisis - which Alan Greenspan was shocked to find could still happen, despite the sweet nothings of Ayn Rand - Republican economics has failed to solve the problems that remain in the economy.

Obama's weak stimulus was too small to do enough. It held the line, but didn't fix Duhbya's job depression - as the estimable Prof. Krugman stated before it passed - with actual mathematical analysis to back it up. The Republicans were determined to prevent the Democrats from fixing the economy the GOP broke. Their only concern is the power to service their wealthy sponsors, not the economy as a whole.

If we had had what I advocate, unemployment would be much lower and the economy would be cooking. The DOJ would be perp-walking and trying the Wall St. miscreants and sending them to Leavenworth if convicted. There would be a new Glass-Steagall in place, and we would be clawing back ill-gotten gains from those who call themselves masters of the universe when they're really only masters of a giant casino con game.

flymorgue2 said...

Krugman would rescue us by building defenses against space aliens. Estimable, indeed.

lovable liberal said...

Too late. You're already here.