Investor's Chronicle asked me for 350 words on whether Obama can lead the US out of recession. My answer was "no," just sliding under the limit by 349 words. Actually my answer is here.
Can Obama lead the US out of the recession?
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They might as well have asked:
"Can Obama make the sun rise?"
Good for you for reframing it as "Can Obama make the sun rise SOONER?"
I hope and pray for his ruination. I don't care if the country goes down the tubes with him. Enough is enough.
A quick note about the paradox of thrift, because it seems to be responsible for much Keynesian nonsense.
The paradox of thrift.
If A saves $100, then B receives $100 less income. Since B's bank account is poorer by the same number of dollars that A's bank account is richer, the credit supply is available in the banking system is unchanged. Therefore, saving does not induce more investment, but simply deprives others of income. Governments should step into the plug the gap in demand which occurs during a recession, right?
Nope.
If A saves $100, then prices will fall. Resources, including capital, that were being used by B earn his $100, will now be freed up for other uses. With lower prices, the purchasing power of each dollar increases; and although the number of dollars available to lend is unchanged, the claim they represent on goods and services increases.
The overall effect is to divert more of societies' resources towards investment, even though there is no change in nominal terms of the number of dollars banks have available to lend.
Higher interest rates (caused by a contracting money supply as people default on or pay of debts) encourage people to hold their money instead of spend it. It lowers prices and frees up capital (temporarily putting people out of work), thereby allowing borrowed money to buy more equipment, tools, and whatnot.
Paradoxes are contrdictions. When a theory contains a paradox, there is something wrong with the theory. Keynesians seem to have made a contradiction the cornerstone of their economic theory. To call that absurd would be too kind. Knowledge is developed by eliminating contradictions, and stagnated by promoting them.
Reality's accounting is perfect. There are no surpluses or deficits: everything is accounted for. The economies that can exist are limited to those which can satisfy reality's high standards. If it seems that foregoing consumption does not create more available goods for investment, then somewhere an error of understanding has occurred.
Lee,
That sounds about right.
If I may add:
Investment in future production requires postponement of consumption on the part of investors to provide for the sustenance of entrepreneurs while they experiment in the creation and production of new means of value creation. Savings and investment represent that foregone consumption.
Dr. Russell,
You and Dr. Boudreaux, as well as other economists of like mind, need to keep on saying what you said at Investor's Chronicle over and over. Hopefully, repetition will eventually drive the point home.
It's not that I wish ill for Obama and the country. My fear is that if they are able to somehow bring about a bit of recovery through these machinations, it will only further delay the needed corrections. Everyone will get back to business as usual until the whole thing crashes again; eventually into a real depression on an unprecedented scale.
That's my fear, that each of these interventions, especially the ones that seem to "work" are in reality, just postponing, and magnifying the effects of an inevitable correction/collapse. And the more the government works to postpone the inevitable the worse it will be; aka Zimbabwe-like.
Lee Kelly wrote: "The overall effect [of savings] is to divert more of societies' resources towards investment…"
Only true if someone else does something to deploy that savings in a useful way. That's not guaranteed. If there is a substantial shift or trend towards less demand (for consumption), there will be little interest for anyone to deploy all the extra savings towards future capacity because there won't be any demand then either.
That is the Paradox of Thrift. If nobody wants to consume anything (much) ever again, nobody will want to invest ever again and both the savings and the associated reduced consumption will be counterproductive.
Lee,
paradoxes are NOT contradictions. Paradox comes from the greek para doxa, i.e., "against [common] opinions". It means that a statement is unintuitive, not contradictory or untrue. Keynesian theory may be wrong, but I don't see the Paradox of thrift as foundational or contradictory.
Assuming that the above statement is true, wouldn't that save us all from frying on the warming planet. How is that counterproductive?
Why would you want to manipulate those who don't want to consume (According to your own words)?
The reason why the consumption is going down is not because people don't WANT to consume, it is because they have consumed their present and future(debt) production and the future is now the present.
Even the poor people in Africa would love to live in Suburbia and drive around in Hummers. The reason they don't is not because they don't want to consume, instead it is because they don't produce anything that they can exchange for that consumption.
If savings goes up and there is no demand for those savings, interest rate will automatically plunge, reducing the cost of borrowing. This is how economy adjusts during a business cycle.
And interest rates are zero.
Current interests rates are not an accurate reflection of the current savings level. Interest rates are driven down artificially by money manipulators at the Fed. Infact, it is a discouragement to save, when we can use some real savings.
When "savings" come from a printing press, it is really not savings.
Savings do not represent a desire to never consume 'much of annything even again', but to consume more in the future: a demand that can only be met by saving and investing.
closing the blockquote
My take on the paradox of thrift:
It is correct that when people choose to save $100 it does deprive someone of $100 income, with savings remaining unchanged. The problem isn't that this is incorrect, but that it's irrelevant.
When someone forgoes spending $100 they're signalling a preference to the market, that the market is over-producing. By saving $100 the person tells the market that the total value of production is $100 less than it was before ($100 less value to the consumer).
The result of this is that the market reallocates resources to bring that $100 value back to where the consumer wants to spend again. The Keynesian view is that this means something is broken, that "aggregate demand" will continue to drop or stay down forever. It won't, it's how a healthy economy works. The Keynesian response is to print or borrow money to get the consumers spending the $100 instead of saving. The problem is that all the Keynesian has done is reduce the value of money by $100, not raise the value of production $100. The same problem persists.
There are a number of things that cause consumers to value production less, all of them exogenous. Things such as poor fiscal/monetary policy and technological shifts. All Keynesians are doing is glossing over the problem. The adjustment will happen eventually, they can't stop it.
I don't think this thread is asking the right question. If Obama is a High Priest in the Church of AGW, as he has hinted at with his nomination of Browner as Church of AGW liaison, then why would he want us out of a recession?
One of the tenets of the Church of AGW, led by His Holiness: The Divine Prophet Algore I, is that American prosperity is chiefly responsible for global warming. Mother Gaia cannot heal herself so long as humans have liberty and prosperity.
The Believers have a golden opportunity to reign in both. Why wouldn't they take it?
"Savings do not represent a desire to never consume 'much of annything even again', but to consume more in the future…"
It might, it might not. That is undefined for the general situation.
brotio – predict 30-40% unemployment by 2010 along with GDP down to about $3-4 trillion. DJIA will literally be shut down.
If savings do not represent the desire to consume in the future, then why do people save at all? Why work that extra bit that you are not going to use anyway? Or why not consume it right away. Please explain, why people save, if they or their descendants are not planning to consume it at some point in the future.
I think Bret highlights the problems I have with Keynesian thinking. It attempts to make 2 dimensional arguments in 4 dimensional spacetime.
Take the whole enormous pile of micros that make up the macro, flatten them to the aggregates, and stop the clocks from running. Then you can make the aggregate adjustments to correct perceived shortcomings.
The problem is that any adjustment you make in t=0, creates a bigger problem in t=1 that also needs to be patched, which in turn creates a bigger problem in t=2, ad infinitum.
You may not know when that savings will become consumption, but stealing it for consumption in the current period is robbing the future period of that consumption. Plus, everyone's time preference is different. Keynes says "screw you, you'll spend it now and like it. We'll worry about the aggregate future when it punches us in the nose."
It's truly a disgusting school of thought.
Bill – Keynesians believe that government must stimulate the economy in the short term(ad infinitum) to keep the rabble from getting too violent.
A entire school of thought behind New Deal programs was not to fundamentally "fix" the economy but to make people feel better about themselves, so they will not think of a Bolshevik revolution.
In retrospect, Tsar Nicholas II was very dumb not to implement a New Deal in Russia back before WW1. But what could have have known…
Concerning 'paradoxes'. You could call Adam Smith's invisible hand 'The Paradox of Self-interest'. That doesn't make it wrong, it just means that it's unintuitive.
Current interests rates are not an accurate reflection of the current savings level. Interest rates are driven down artificially by money manipulators at the Fed.
– Posted by: Oil Shock | Jan 20, 2009 4:28:59 PM
This might be true normally but it is not true in the case of this recession. The market drove short term treasury rates down to zero all by itself.
A paradox can also be the end result of a massive class of consumers and earners whose collective knowledge of economics is so skewed they do the exact opposite of what the real world tells them they ought.
That can explain how a paradox can exist and sustain.
Kant also explains how they lead us to ruin.
Oil Shock wrote: "If savings do not represent the desire to consume in the future, then why do people save at all? Why work that extra bit that you are not going to use anyway? Or why not consume it right away."
People save for many different reasons. But let's consider one simple and very common reason: security. I'm at that interesting stage in life (later middle age), where it's unlikely that I will ever spend all of my assets, even if I were to retire tomorrow. Indeed, it would be impossible to exactly spend all savings since I would need to know my exact instant of death and would need to know what returns my assets would get between now and then. Neither are knowable.
So as a result, I'm building up savings well beyond what I believe I will ever consume. Just in case.
None of my current savings will be utilized in order to provide for my future consumption because; (a) that consumption may not happen; (b) it's not known what that consumption may be if it happens; and (c) any capital deployed now would depreciate and wouldn't provide much, if any, return on investment by the time the future consumption, if any, happens.
If enough people cut back on discretionary spending and save for security/"rainy day" reasons, nobody can effectively deploy those savings because it's not known if, what, and when the future consumption will happen. Then employment drops and the economy operates below capacity.
Ever heard of Greenspan put? Market learns to anticipate Fed's moves. Fed is not market, but a market manipulator. Fed never ever dissappoints the market. The distortions get bigger and bigger as time goes by. Some one else has done a good job of describing this "paradox" better.
link here
Which is one of the reasons why people usually prepare a will. Which is a plan to spend the money.