Crowding Out
If you have been following the rants of the clueless opposition to the stimulus package you will no doubt have heard the term crowding out. This being the idea that, because there is a limited amount of output and savings, any increase in government demand for goods and services must result in a corresponding decrease in private investment or consumption or both.
Which is not a bad description of the US Economy when it is operating at capacity as it was, say, at the start of the Iraq war. One wonders where these guys were back then but that is another question.
But Wonks Anonymous hopes that the reader will understand that the current situation of the US economy bears no resemblance to this picture. Right now the quantity of savings available to the economy is anything but fixed. US consumers have awakened from their long dream of easy money and realized that they need to build up real assets to replace their bursting bubble profits. We are expressing a collective desire to save. To direct current income and the corresponding output away from consumption and toward projects that will increase real future income and output.
It is usually the job of capital markets and investors to direct our savings to useful projects. These captains of capitalism have, unfortunately, gone AWOL at this moment. They too need to detox from the bubbles of the past twenty years. As a result the increase in our desired savings has not been met with an increase in desired investment.
If no one uses our savings to buy goods and services for productive projects then demand and output will fall. As demand and output fall, firms will cut production and jobs. As jobs are cut, our incomes will fall which will force us to cut back on our savings. Eventually the economy will naturally adjust to a level of savings which is in line with the desires of investors. The adjustment will be driven by our descent into poverty, which is not conducive to saving.
If the government steps in at this moment to take our savings and use them for projects - many of which will actually increase our productivity and lower future production costs - it has robbed investors of no opportunities that they were willing to take. Instead it has stepped to do the job that our capital markets should be doing, channeling our savings into useful projects that build future economic growth. We get to our desired level of savings and, considering the sorry neglect of our public sector, we probably get a better economy.
The only thing that is lost in this transaction is the pride of our financiers who have so long considered themselves the acme of efficiency and human intelligence. This is a sacrifice that Wonks Anonymous is more than willing to make.
Which is not a bad description of the US Economy when it is operating at capacity as it was, say, at the start of the Iraq war. One wonders where these guys were back then but that is another question.
But Wonks Anonymous hopes that the reader will understand that the current situation of the US economy bears no resemblance to this picture. Right now the quantity of savings available to the economy is anything but fixed. US consumers have awakened from their long dream of easy money and realized that they need to build up real assets to replace their bursting bubble profits. We are expressing a collective desire to save. To direct current income and the corresponding output away from consumption and toward projects that will increase real future income and output.
It is usually the job of capital markets and investors to direct our savings to useful projects. These captains of capitalism have, unfortunately, gone AWOL at this moment. They too need to detox from the bubbles of the past twenty years. As a result the increase in our desired savings has not been met with an increase in desired investment.
If no one uses our savings to buy goods and services for productive projects then demand and output will fall. As demand and output fall, firms will cut production and jobs. As jobs are cut, our incomes will fall which will force us to cut back on our savings. Eventually the economy will naturally adjust to a level of savings which is in line with the desires of investors. The adjustment will be driven by our descent into poverty, which is not conducive to saving.
If the government steps in at this moment to take our savings and use them for projects - many of which will actually increase our productivity and lower future production costs - it has robbed investors of no opportunities that they were willing to take. Instead it has stepped to do the job that our capital markets should be doing, channeling our savings into useful projects that build future economic growth. We get to our desired level of savings and, considering the sorry neglect of our public sector, we probably get a better economy.
The only thing that is lost in this transaction is the pride of our financiers who have so long considered themselves the acme of efficiency and human intelligence. This is a sacrifice that Wonks Anonymous is more than willing to make.
The main concern is whether, after the stimulus kicks in and jobs/wages recover, people will return to their normal spending rate. If so, we're more or less golden. If not, Reich is right about our need for perpetual (or at least indefinite) public spending. Which is not a bad thing, so long as it doesn't stunt our productive progress. Roads are great, but not very useful if nobody is buying goods to haul over them.
I do not look for a short term fix fo this one. First, we do not need to resume our old spending habits. We need to save and invest and - for us boomers - we have about a decade to do so if we want a decent retirement. If the private sector wants to convert these savings into investment this is fine with me. If not we will need to do it collectively through our elected representatives.
There are plenty of projects that will work. We need to find, test and implement them. Mistakes will be made but I do not see the private sector as having any particular immunity from mistakes here.
We have let our public sector slide for some 30 years so we have a lot of room to work in here.
WA
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You are basically arguing for increased socialism. I do not disagree with you. I'm just curious how you are going to convince the American populace that this is the best thing to do. I suppose the first step is to not call it "socialism". But you know that will be the first thing out of the GOP's mouth when you start talking about increased public investment. So what is the political solution for those of us who see this need?
On the contrary. Please see the post titled Social Democracy . I am for markets when they work and I support government interventions when markets fail. I think that capital markets have clearly failed and we need to stop trying to revive them. When our fianacial giants are ready to play again we can let them back into the game.
WA
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My point was that other people /will/ call you a socialist *cough*Limbaugh*cough* as soon as you start talking about permanent increased government spending. My only concern was whether it would be possible to overcome this semantic prejudice or not.
People with college degrees (even those who took dreaded economics 101 classes) might understand your argument for social democracy, but what about the other 70% who've been trained as if by Pavlov to urinate in fear when they hear the word 'socialism'?
We need to work to gradually change their minds. The way that things are going, we will have plenty of time.
By the way, its probably somewhere under 50% - die hard Republicans are closer to 30% of the population plus change. Most people don't like fights and just want to see everyone live together in peace. Which may be unrealistic but is a natural desire.
WA
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