It is a common shibboleth that saved funds mean a decline in aggregate demand but this doesn't have to be true. Savings often fund investment, which boosts aggregate demand and creates jobs.
Admittedly, savings don't fund investment when the banking system is malfunctioning. Or it may take so long to translate savings into investment that incomes are falling in the meantime and S and I follow them on the way down (Keynes's scenario). Still, you shouldn't assume that savings translate into a collapse of aggregate demand.
Michael Mandel adds:
I believe that Obama’s $300 billion tax cut is essential to
‘recapitalize’ the American consumer, just like the banks are being
recapitalized.
With that as background, consider the tax cuts in Obama's stimulus plan. If the money is spent, you get a boost to aggregate demand. That was the goal. If the money is not spent, it is a wash. The government borrows for people (at a low rate) and people save it. Since savings has gone up, the borrowing is sustainable and it doesn't even have to crowd out additional government spending, if that is what you want.
Furthermore these people would have done some borrowing anyway, so their ability to implicitly borrow at a lower interest rate creates a small, positive wealth effect. The savings also means you have supplied those people with some form of implicit insurance, and at very low risk of moral hazard.
I wouldn't expect a whole lot of recovery from these scenarios, but there's nothing problematic about having some tax cuts in the stimulus package. If you're looking for another opinion, here is Joseph Stiglitz.
I don’t get your first paragraph. Whatever you’ve diverted your income from (into savings), those folks are going to have less money to invest instead.
I’m not seeing the increase in money for investment?
“Furthermore these people would have done some borrowing anyway, so their ability to implicitly borrow at a lower interest rate creates a small, positive wealth effect.” Perhaps any given individual will appreciate the low “interest rate” on this money (in most cases they will never actually pay taxes to support this borrowing, so it’s really like an interest rate of -100%). But at a macro level does it really make sense to raise revenue at a deadweight loss of $1.50/revenue when the typical consumer debt rate is probably in the ballpark of 8-9%? This seems no different than paying off a fixed-rate mortgage with a credit card.
I’d have to think about it more carefully to be sure, but I think the logical implication of Tyler’s arguments (which seem correct to me) is that it always makes Americans richer if the government reduces taxes and instead relies on voluntary borrowing to fund its spending. In other words, I think Tyler just made the case for anarchy. Woo hoo!
I continue to be puzzled by the supposed “tax cuts”. The deficit is expected to grow by some $1,200,000 to $1,500,000 MILLION this year alone. There are some 110 million households in the US, so a very rough approximation of new debt per household taken out this year alone is some $10,000. Even if you don’t beleieve in perfect Ricardian equivalence, something is clearly wrong here – you can’t tell me I am getting a net tax CUT in any way.
By the way, any “savings” in financing cost from having the government borrow in your name at a lower rate are easily swamped by administrative costs and other inefficiencies in collecting and managing these schemes.
Get real…
Sorry for the grammar errors in my previous post. I pushed the post button too quickly.
If the money is not spent, it is a wash. The government borrows for people (at a low rate) and people save it.
You can’t be this stupid.
- first, the one where the government distributes its stimulus and all the recipients indeed immediately invest it in government debt. ‘A wash’, you say? Not so fast – the future obligation to repay this debt does not rest evenly on everyone, rather it falls disproportionately on the productive and the young. Maybe you can see the problem more clearly via reductio ad absurdum: let’s have the government give each person in the US $2 million and have them invest it in 2% T-Bills. Did nothing change? On the contrary, taxpayers are now obligated to pay everyone in the US $40,000 per year in interest. At the margin, additional government debt should discourage other investment: both by crowding it out, and second by reducing the expected long-term profits because of future expectations of higher taxes.
their ability to implicitly borrow at a lower interest rate creates a small, positive wealth effect.
Except that the repayer of the debt and the one who gets the money are not actually the same entity, despite the use of ‘people’ or ‘these people’ to stand in as some sort of monolithic aggregate saver/borrower.
Another question:
We all know GDP can be gamed. (I think you could do it with just two companies who rapidly buy the same object back and forth from each other). So what does the government propose to do to ensure that any stimulative effect is as “non-gaming” as possible? Just look at a wide range of statistics including employment and wages, not just GDP?
Interestingly, if most people use the extra money to pay off debt, this means that the government has mostly turned high interest consumer debts into low interest government debts.
What do you think such a thing means? And why would keynesians consider such a change a bad thing?
In this EconTalk podcast with Keynesian economist Steve Fazzari, it is explained (repeatedly) why the “paradox of thift” means there will not be more total investment. I don’t know if it’s accurate, but it’s a direct response to a critique similar to Tyler’s.
http://www.econtalk.org/archives/2009/01/fazzari_on_keyn.html
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