Savings, the Keynesian “loose joint,” and tax cuts in the stimulus plan

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.

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