Blogjam

Russell,

That was interesting. One point caught my eye. Somebody mentioned the idea that we need to get to the point on the Laffer curve that produces the maximum revenue. I'm thinking that we need to get to the point on the Laffer curve that produces the revenue that the government needs. Not buying the idea that the government should collect as much as possible and then find a way to spend it.

The blogjam was fun to follow "live" over lunch. I hope you repeat it. I might prefer a more narrow focus, but this session was advertised as a year-end wrapup.

Russ: "Andy, the problem with social security reform is that the average person isn't panicked yet ..."

My very smart friends accept the trustees claim that Social Security is funded through at least 2042. That's what mass media tells them, so why should they panic? They can't be bothered with talk about government accounting legerdemain and unfunded liabilities.

Paul: "Negative personal savings rates are not a reason for concern when Americans are wealthy (household balance sheets are strong). Low savings rates are a sign of economic vitality."

I'm not an economist, but this made sense to me.

were you or someone else really in pajamas?

John Dewey -- savings provide a flow of funds that finance investment. Wealth does not do that. By trying to make wealth and savings the same you are confusing flow vs stocks.

But explain to me how an increase in your home that does make you wealthier in nominal terms helps you build productive resources or investments that make you

wealthier in real terms.

Spencer,

I don't see anything in Paul Hoffmeister's statement to indicate he has confused flows vs stocks.

Here's Victor Canto's explanation about why low savings should not be a concern:

"What constitutes true net savings? Is it the actual savings (an income statement) or the change in net worth (a balance-sheet item)? When one thinks about it, both will result in a higher net worth. If you take the sum of private savings and the change in net worth as a percent of GDP as the approximation of the true savings rate, by my account, that rate is on the order of 10 to 15 percent today — within the historical range. That’s quite a different story than the one the deficit mongers are telling.

The savings rate and the trade balance are flows, and as such, they are part of the economy’s income statement. On the other hand, net worth is part of the economy’s balance sheet. It is a mistake to judge a company solely on their income statement without paying attention to their balance sheet. The same logic applies to countries.

We have the strongest balance sheet in the world today. With President Bush pushing his second-term initiatives for tax reform and the “ownership society,” we should continue improving our balance sheet both in absolute and relative terms."

http://tinyurl.com/bb32z

Change in worth doesn't seem to be a good equivalent to savings. Where is most of the positive change coming from in the past half-decade? Ah... from equity in real estate! All this spending of late comes from record borrowing against home equity. But it looks like a good portion of this equity is an illusion--based purely upon speculation.

Consider that real estate always comes back to an inflation-rate growth curve. Given this, I don't think its legitimate to count any "capital gains" above that as real. Instead, the negative real rate of savings is essentially being paid for by more debt than we've ever taken on before.