Wednesday, October 26, 2011

Misguided Fiscal Policies?

This is an interesting and provocative piece, with the core thesis that our economy is fundamentally (personal) consumption driven rather than led by (business) investment.  It's kind of a dynamic version of the "paradox of thrift."  If we save more in aggregate, the economy will be smaller because there aren't the investment opportunities to suck up those savings.  I agree with the suggestion that we should be shifting incomes policy toward labor income and away from capital income.  So our tax system has that backwards.   This is the argument the left needs to change the policy direction.

I would like to see a life-cycle version of this argument, however.  I don't fully get at the individual level how one saves less over the life cycle and yet still has a tolerable wealth during the retirement years.

I should also note that the argument is subject to a "Moore's Law" critique, since everything is measured in value (dollar) units as opposed to physical output units, e.g., my home computer now is more powerful than the super computers of the 1980s.  So we've endowed most people know with super computer capabilities, if seen from a 1980s perspective, which seems like Herculean investment.  But in dollar terms it's not that big a deal.  To the extent that information technology pervades our lives, this is a significant measurement error.  But not all capital follows Moore's Law and the the non-IT capital investment in the economy hasn't grown proportionally with GDP is a big deal issue.  It's as if IT is substituting for non-IT wherever possible and the consequence is perhaps productivity growth in some sense but not GDP growth.

1 comment:

Lanny Arvan said...

This comment amends my remark about seeing a life-cycle version of this model. Direct transfer payments from working people to senior citizens, which is what Social Security is in principle, represents zero saving in aggregate (if the seniors spend the income and don't save it), so presumably you could have a lot of that and still be consistent with the argument made in the essay.

However, it would appear that accumulation of substantial personal wealth to establish a legacy of some sort would not be consistent with the argument, as that accumulation need not be offset by consumption elsewhere in the economy.

On a personal level it is hard to get around the idea that saving is virtuous and consumption has a bit of sin in it.