Saturday, August 25, 2012

The watershed of wealth

Savings and the post-capitalist economy.

Consider a thought experiment: the Federal Reserve gives every citizen a million dollars, on condition that they don't spend it. Indeed, it could just as well be a trillion dollars. What would inflation be? What effect would it have on employment? However much wealth we sit on in this way, it would not cause inflation or stimulate the economy, or do much of anything else. It is spending that creates all the other economic effects, not wealth.

This is sort of what the Fed has been doing in the banking system by its provision of extra reserves. They may not have stipulated a no-spending condition, but the banks take care of that on their own by their lack of enthusiasm for lending. And once their animal spirits revive, the Fed will want to reel those reserves right back in.

The exercise also reflects on the larger balance of savings and spending in the economy. Employment depends on the flow of ongoing spending. But spending is dependent on individual decisions that divert income to either savings or consumption. If the amount going into the savings pool increases, spending declines and employment follows, even though nothing in the real economy has changed- people have not become less (or more) productive, and collective wealth has actually increased. So why should the employed suffer for a temporary decline in demand, when the savings suggest that this demand will rematerialize again at some future date?

In a way, we seem to be turning into Japan. Japanese citizens have been champion savers, buying prodigious amounts of their government bonds, while economic demand keeps faltering into deflationary territory. Their demography is just topping out with an aged bulge, who rely on savings to see them through an extraordinarily long life span. They have twice the level of government debt that we have, yet seem to be doing just fine, certainly not suffering from any inflation problems or solvency problems.

The issue is an enduring mismatch between capital needs and savings needs. The latter have now far, far outstripped the former, so returns on savings/invesments are practically zero. We are, in some respects, in a post-capitalist age. An age where there is far more money and wealth sloshing around the system than anyone needs to produce new factories and make other capitalist investments. New economic activities are concentrated in service industries and highly leveraged information technology- not areas where a great deal of capital is needed. The primary need is for savings, (or in the current environment, debt reduction, which is equivalent), since we are collectively (via the baby boom and the decline of exponential human reproduction) heading into new demographic territory where the aged generation isn't the light burden that they were in the past.

A solution (this is classic Keynes, of course) is to accept that the government is well-positioned to make up the difference in economic demand while all these savings are piling up, providing bonds that are not capitalistically productive, but are safe and contribute to the common good through other means like keeping people employed, providing health care, building the internet, educating more nurses, keeping the currency value stable, and the like.

An example that comes to mind is Mitt Romney. What is he doing with his vast savings? Is he creating jobs and trickling down? Is he taking risks? I don't think so (other than what he is spending on his campaign, of course!). There are the dressage horses, and a few homes in far-flung places, but mainly there are a lot of investments- very passive investments in liquid markets of stocks and bonds. Stocks provide liquidity and valuation to the "owners" of corporations, but they don't really create jobs. Very little stock valuation translates into corporate growth. What is Facebook doing with its stock bonanza, or Apple? Virtually nothing. Stock values translate into paper wealth, like real estate prices likewise, without creating spending.

So how much wealth does it take before someone actually starts spending it, creating jobs and trickling down? That is a key question. In my opening thought, a condition of no-spending was instituted. Perhaps that was unrealistic, but the rich are rich because they hang on to their money. Romney doesn't spend all his wealth creating homeless shelters, centers for world peace, institutions of higher learning, or bright new startup companies. In fact, he squeezes every nickle, leaping through hoops of incredible difficulty to deny as much as possible to the government in the form of taxes, and preserving as much as possible for his offspring who did nothing to earn it, so that his wealth is not spent, virtually in perpetuity. At best, it is invested in the passive vehicles mentioned above, whose return is destined to decline as our capital needs diminish.

More broadly, while personal savings rates in the US are not so great, overall wealth accumulation continues apace, after the vertiginous drop at the beginning of the GFC (global financial crisis). Much is thanks to the federal government pumping out enormous quantities of bonds to (mostly corporate and bank) savers and concomitant spending to actual workers and the economy at large, some of which returns again as bond purchases.

We have to reconceptualize the flow of GDP and economic transactions as a small aspect of the whole economic picture, a river within a much larger watershed of savings, debt, and wealth levels, easily flooding or drying up from changes in sentiments- about saving, consumption, real estate values, and much else. If we don't mind hunkering down with our stockpiles of ammo and emergency rations, we could get by, perhaps, but I think we rightfully have higher expectations of this river's consistency, especially when it comes to unemployment, which is individually and socially so devastating.

Of course this leads to questions of how high the flow should be. Organic demand may be fickle and destructive in its cycles, but it is also difficult to manage artificial levels of demand, to know or predict where they should be set. This is a big economic field, balancing inflation with unemployment, and weighing the demand impacts of taxes vs spending, and of spending on public goods versus transfers to needy recipients. But it isn't hard to figure out when we are in a crisis like today that we are not at the optimal level.

And optimizing this river's flow, especially during downturns, requires one of two policies from the government's perspective- either liberating existing wealth from its static, inert condition, or issuing new wealth by way of new government spending (and bonds, if it wishes to offer them). Conservatives should be wary of their knee-jerk calls for reductions in government spending and borrowing, since the alternative is sharper taxation and expropriation. The 99% may be fooled for a while by scare-mongering about deficits, but will ultimately revolt from the clutches of rising economic injustice so baldly mapped out by the Republican party.

This is, then, a trickle-down theory of sorts, but one which involves active management of the watershed for consistency of the ultimate flows, rather than a faith-based coddling of the rich, (under which I include the reduction Romney's own taxes under the Ryan/Romney plan from his current scandalous 13% to an outrageous 0.8%), who rarely display the entrepreneurial spirit they preach so reverently, or the community-minded benevolence which would be another route to a real, broadly effective form of wealth management.


  • The wealth & power view from the National Review- comical, if it weren't so appalling.
  • The corrupt are trying to rewrite the history of their corruption.
  • QE and trickle-down.
  • Pollution from gas drilling- what would Ayn Rand do?
  • Dirty energy hearts Mitt. 
  • Another example of a gene wearing more than one hat.
  • Russian style neo-fascism and Pussy Riot. I particularly liked how the church called for "mercy" only after the show-trial and sentencing. Very classy!
  • The incredible powerlust of Islam and its jihadis continues, now in Mali. Evil in its most concentrated form.
  • Republican convention may have to face up to that global warming hoax after all.
  • Economics quote of the week, from Bill Mitchell:
"Charles Killingsworth was a strong advocate of public employment (PSE) programs to relieve unemployment and provide a better life for everyone. In his speech he said that “a ten billion dollar public service employment program … can increase gross national product at least as much as a ten billion dollar tax cut. That is elementary macro-econmics.”
In fact, it would increase GDP by considerably more because some of the tax cut will be lost to saving and it is highly likely the marginal propensity to consume of those given wages in the program would be higher than the national average."

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