Department of “No”!

by on February 13, 2008 at 5:20 pm in Economics | Permalink

Yet the rich devote a smaller percentage of their earnings to
buying things than the rest of us… They already have most of what they want.
Instead of buying, and thus stimulating the American economy, the rich are more
likely to invest their earnings wherever around the world they can get the
highest return.

That’s Robert Reich, here is much more.  How shall I put it?  Savings are good for the economy!  Savings are invested!  (and this is about the long run)  Arguably Americans don’t save enough!  America is a net importer of capital, not a net exporter!

Etc.

Addendum: This, from Barack Obama, belongs to the same department.

1 richard February 13, 2008 at 5:46 pm

If you are looking for short-term stimulus, increasing spending in the short-run would be helpful. If you are looking for long-term growth, you need both investment capital and consumers to buy that which investment capital helps produce.

2 EclectEcon February 13, 2008 at 6:14 pm

Reich appears to be an old-time Hanson-type Keynesian in his column. I was bothered that he would recommend trying to increase the spending by people who already don’t save enough.

And I wonder whether he would propose taxing those very people to choke off their spending if the threat of inflation grows.

3 Chris February 13, 2008 at 6:42 pm

“It’s a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart”

That Obama comment is so breathtakingly stupid it almost makes me nostalgic for the demagogic skills of John Edwards.

1. force?
2. walmart is way above min wage
3. employment at wal-mart is nothing to do with nafta
4. this completely ignores the benefits of low prices to many more
5. maybe parents should have built extra skills instead of having babies they can’t afford
6. he’s fretting about increased competition from low-skilled workers, and also wants to open new avenues for them to immigrate to the country?!

4 John February 13, 2008 at 7:01 pm

I disagree that Obama’s comment was stupid, in fact I think he’s right on. NAFTA allows large companies to ship their goods to the US from Mexico and Canada largely tax free. Though the intention of the bill could be debated, what has happened is that US companies were able to move their manufacturing processes to Mexico and utilize their cheaper labor.

And the problem isn’t just for American workers.
Brad Delong quoting The Economist http://econ161.berkeley.edu/movable_type/archives/001178.html:
But local farmers are still going out of business because their costs—from diesel to electricity to credit—are about a third higher than those north of the border. Poor transport makes a crucial difference: it costs about three times as much to deliver corn by rail from Sinaloa to Mexico city as it does to ship it there from New Orleans via Veracruz.

So who wins in this? Big American businesses. Not American workers. Not Mexican workers. Just those who are already rich.

5 MikeP February 13, 2008 at 7:40 pm

You get the distinct impression Reich thinks that if people buy things just to burn them in bonfires we will all be better off.

The ideal plan along these lines would be large government-run bonfires. Bring your goods and your receipts showing you bought them in the last 30 days, throw the goods on the fire, and exchange the receipts for one from the government for use as a tax deduction.

6 ideogenetic February 13, 2008 at 8:42 pm

Why can’t the Say’s Law fundies see that you can create all the capacity you want in China, but it won’t help Americans unless they have the INCOME to buy it. Where do they get the income? From telecommuting to China?
Picture an America where Bill Gates and Warren Buffet have all the income. They have no marginal utility for the millions of cars, houses, suits, cases of beer and football tickets to keep the economy going. The only way to keep the economy going is to loan the masses billions of dollars. The Chinese, Japanese and Middle Eastern countries have been doing just that as wealthy American investors export their productive investment to China, thereby hollowing out the economy and further eroding real income.

The paradox is we need sticky wages to fall to attract productive investment back to the U.S. If the wage rate paid by corporations is supplemented by the government (by progressive taxation), that’s one way to approach the sticky wage problem and perhaps the need for welfare itself!

7 Apachethetic February 13, 2008 at 9:19 pm

Some spot on comments by ideogenetic, I think it helps to consider a basic Heckscher-Ohlin model. Free(r) movement of capital between Mexico and America causes wages in mexico to rise, and wages in america to fall. The big winners are American employers/renters, and mexican workers. Overall, free(r) trade hurts American consumers.

This is because the increase in working population drives down wages and the increase in aggregate demand offsets the firm’s ability to lower prices. This means little change in price for goods, and falling wages. This loss of real income is exactly what I believe Ideogenetic is mentioning.

The problem isn’t actually NAFTA though, it’s just that human capital migrated faster than the market could respond (such as creating more jobs). The market will correct itself, of course. But it may mean a change in America’s terms of trade.

8 Keith February 13, 2008 at 9:44 pm

Apparently Obama is to economics what Mike Huckabee is to evolutionary biology.

9 R. Richard Schweitzer February 13, 2008 at 10:20 pm

We “save” exactly the right amount for the prodcutive needs of the U.S. If more were required, as it has been in times past, and may soon again be, it will be forthcoming, sua sponte.

Intermediation (transaction cost) that is still rampant in the “high savings” perimeters has been substantially reduced here, and another whole layer recently self-employed in the fabrication of variations in financial instruments is about to be redirected out of that funcrtion. Bless Jack Dreyfuss – anybody remeber what he did? Try money market funds – $1 = 1 share. Beat the old “Savings Accounts.” That was only part of what has happened, and will continue.

We do not “import” capital. If we did, it would be priced like other goods and resources. We import labor and resources. Others store the excess of the returns on their labor or resources here, where it can be tied to the most productive uses in great safety.

There is no “capital flight” is there?

10 Matt February 14, 2008 at 2:37 am

(Closed italics tag)

“Some spot on comments by ideogenetic, I think it helps to consider a basic Heckscher-Ohlin model. Free(r) movement of capital between Mexico and America causes wages in mexico to rise, and wages in america to fall. The big winners are American employers/renters, and mexican workers. Overall, free(r) trade hurts American consumers.”

As another commenter said, it only happens in the same industry. T-shirt makers in China have been doing a lot better while a t-shirt maker in America. But who here makes t-shirts for a living?

In reality, the supply of workers in that particular category goes somewhere else. Just about all of our great-grandparents probably grew up farming, working in factories or doing some kind of manual labor. We eventually learned how to either automate those processes or facilitate under-utilized (“cheap”) labor to do them overseas.

If you’re closed-minded and think making t-shirts must pay a decent wage in America, you wouldn’t like the result of this process. But for those willing to go into the new fields demanded by both American consumers with lower costs of living and foreigners with higher wages, the payoff is tremendous.

11 MostlyAPragmatist February 14, 2008 at 5:41 am

I’d be willing to cut Obama some slack. He’s a public figure and his every word is recorded. Even economists writing on their blogs sometimes make outrageous claims. I once saw a GMU economist claim there was no housing bubble! 😉

12 Boris February 14, 2008 at 8:52 am

How about this:

The American savings rate is low because middle and lower income americans aren’t saving enough. These people need to be encouraged to save more.

The wealthy have excess money and so they save. We can either let the market turn this into investments or we can tax their excess wealth to invest in public goods such as infrastructure, education and research that have long term payoffs for the entire society. I guess some of this provides some direct economic stimulus but not very much.

13 spencer February 14, 2008 at 9:20 am

I’m reading all these claims about the Us not saving enough and a lack of investmetn ideas, etc., etc., etc., yet no one seems to bring up the price of capital.

Around 1980 — when the US begin running a structural trade deficit and importing large sums of capital — real interest rates rose sharply and have remained much higher ever since.

If all the above comments are true there should not have been a structural shift in US real interest rates around 1980. The much higher levels of real US interest rates since 1980 strongly implies that the above comments are all incorrect.

i’m sure it will be interesting watching everyone explain why i’m wrong.

14 Vin February 14, 2008 at 10:21 am

Without savings, how can we make unscrupulous sub-prime mortgage loans?

15 ideogenetic February 14, 2008 at 12:11 pm

Spencer,

Low savings (government and trade deficits) raises real interest rates because demand for borrowing rises, right? Plentiful savings means lower real interest rates.

16 MikeP February 14, 2008 at 1:49 pm

the rich can and will invest that money overseas (especially in current conditions), where it does the US consumer/worker precious little good, if any.

Because, as we all know, dollar bills are made of special paper that evaporates once it crosses the national border.

17 M1EK February 14, 2008 at 5:38 pm

“Because, as we all know, dollar bills are made of special paper that evaporates once it crosses the national border.”

The claim all the supply-siders and their enablers make is that rich people will invest their savings in this country which leads to people in this country getting jobs and other benefits. If they instead spend that money investing in a factory in China, let’s say the job benefits for the US are likely to be less than zero.

18 Person February 14, 2008 at 6:20 pm

spencer, pardon me, but what the hell are you talking about? Real interest rates are *high* now?

Let’s see, 10-year treasury … 3.8%

Inflation … 2.4%

Wow, a 1.4% real interest rate *sure* is high, isn’t it?

19 Robbie February 15, 2008 at 1:03 am

As a Barack Obama fan, but also a free trade fan, I hope Obama is really not as anti-trade as his rhetoric suggests. There are certain political issues, it seems, where politicians have to take a certain dubious position to be viable because there are powerful interest groups that can and will make you pay if you don’t toe their line. Israel is one. Free trade seems to be turning into another, at least for democrats.

You’ve got to love a political system that demands politicians be economically illiterate or dishonest.

20 M1EK February 15, 2008 at 9:37 am

MikeP, then you’re talking about an even less direct relationship – and I’m even more skeptical. There’s an awful lot of magic pixie dust that has to go just the right way in your theory for these rich-savings-dollars to turn into jobs for Americans.

Remember, that’s the original claim of you supply-siders and your enablers: that when the rich “keep more of their money”, they wisely invest it in ways that create more American jobs. Not in ways that make US dollars worth more; or any one of a dozen other things – the claim was about the jobs. Directly.

21 Cliff February 15, 2008 at 10:25 am

M1EK,

No magic pixie dust is necessary. In fact the result is inevitable and inescapable. When your dollars go overseas, they come back, and when they come back they are used to buy goods or to invest in American businesses, no different than if the money never left at all. There is no difference between investing overseas and investing in the U.S. as long as it is done with U.S. dollars.

The only time that is not true is if the overseas trader burns the dollars rather than get some value for them- an unlikely scenario. But if that’s what you’re hanging your hat on, then keep in mind that the result would be lower prices ad increased standard of living for everyone in America- essentially America would be getting free goods/services/equity from overseas.

22 MikeP February 15, 2008 at 2:08 pm

Eventually the dollar comes back to our economy, sure, but not necessarily in the form that helps that worker, or for that matter, any worker like him.

You may have a point if all that worker can do is work at a t-shirt factory. In that case it is true that investment in t-shirt factories in China will have a hit on his ability to find a job or his pay should he find one.

But all the workers who are not like him see a benefit through the leverage of comparative advantage.

Just so I am clear on the boundaries of your mercantilism…

1. Are you as protectionist with regard to consumption as well as investment? That is, are you as against someone buying a toy from a Chinese firm as you are against someone buying stock in an Chinese firm?

2. Is the investor in Illinois who invests his money in an Indiana firm an evil supply-sider (-sidee?) who is hurting the workers of Illinois?

23 scottynx February 15, 2008 at 2:43 pm

M1EK, Americans have around 80% of their stock-holdings in US companies.

24 M1EK February 15, 2008 at 5:43 pm

The obvious implication in the “rich guy saving money is great because he will invest it” is not only that the current figure is 100% in US job-producing companies, but that it’s not moving down either.

If not true, you should stop dishonestly saying that each dollar the Rich Dude Saves gets Invested In Our Jorbs. Some do, and some don’t; and the jorbs might be here or they might be there. And that might be good or it might be bad; but just Stop Saying It’s An Investment In Jobs Here If It Isn’t, OK?

25 Jacob Oost February 16, 2008 at 1:25 am

M1EK, it is undeniable that money invested overseas by Americans will be redirected here, because that is how the money conversion process works.

More to the point, we shouldn’t be concerned with money or jobs here, the real point is wealth–i.e. actual things. Money invested overseas in a widget factory means cheaper widgets here at home. Thanks to outsourcing of manufacturing, low-income people can afford luxuries like mobile phones and DVD players. Somebody hung up on whether that person kept their job or not might have prevented the outsourcing from ever taking place.

26 Jacob Oost February 16, 2008 at 9:40 pm

Me? That was the first comment I made. As for “libertarian ideologues” moving the goalposts, everything I’ve read on the subject of globalization by any economist, libertarians included, never tried to give the impression that money invested overseas translated to increased jobs at home.

If anybody is moving goalposts, it’s the “libertarian ideologues” who posted comments here promising increased jobs from overseas investment. I can’t answer for them, since I’m more utilitarian than libertarian.

27 M1EK February 17, 2008 at 9:33 am

Jacob, the posting itself from Tyler argues that investment translates into better stuff for non-rich Americans (and not in the “cheaper DVD player for an unemployed guy” fashion).

Then, start following the comments and the narrative is very obvious. The claim about US jobs isn’t made directly by the lib-ideologues; but they show their stripes by viciously attacking the intelligence of anybody who argues the opposite.

Although you get pretty close in comments like this:

“When the rich invest their money, it doesn’t just sit there. It gets spent, just by someone else! In fact, where does he think companies get the money to pay their workers wages, which are then spent on other goods and services? Duh: investors!”

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