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Stimulus: The Differences Between Spending, Saving, Storing, and Investing August 2, 2008

Posted by federalist in Economic Policy, Taxation.

It’s easy to criticize the Federal government’s plan to “stimulate” the economy by sending money to taxpayers who didn’t earn too much last year.  The government believes that those people have the highest marginal propensity to spend.  I.e., the government is trying to boost current retail spending by taking money from both future taxpayers who can’t spend now, and from current wealthier taxpayers who presumably are more likely to save than to spend.  The government’s canard is that this is the best way to lift us out of the current credit crisis and recession.

It’s worth reading Steve Waldman’s exposition on the Paradox of Thrift.  “Saving” can take the form of storage or of investment.  The latter stimulates, the former does not.  I.e., if we save in the form of stocks, bonds, or other stakes in capital markets we are really making an investment in future production, which in a virtuous cycle both enables future consumption and increases current employment and incomes.  However, if we save by accumulating stores of value — say land or old art — we do little more than create scarcity rents for those who possess that fixed supply.

It does appear that saving is now skewing more towards storage than investment.  Waldman explains why this may be happening, and why “stimulus” spending is not a good response:

Storage eats wealth, while productive enterprise creates it. People know this. No one “invests” in gold or oil when a financial system is working. They do so when it is broken. Like now.

Encouraging people to go shopping in order to help the economy is not “second best” policy. It’s a desperate last resort. We’re not at a point where there’s so little economic activity that we can’t foresee future wants. We’re at a point where people are beginning to shift from investment to storage because of a well-deserved loss of confidence in the financial system. Encouraging consumption now is nihilistic. It feeds into a vibe (I feel it personally, do you?) that saving is so uncertain and money so volatile that one might as well spend, ‘cuz who knows what tomorrow might bring. The right way to sustain aggregate demand and maintain current income is to figure out what we should be investing in … and then to put current resources to work. Our financial system is failing spectacularly because it erred grievously. It built homes and roads and sewers that oughtn’t have been built, it “invested” in vacations and plasma televisions, and it paid itself handsomely for doing so. That’s not a problem we can spend our way out of.


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