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It seems like discussion of Piketty’s Capital has run its course and much of the commentary has moved on (though not necessarily from the broader topic) so now is as good time as any to peer back and reflect on how the debate around the book ended (if such a thing can be summarized). From my own vantage point, the debate about the book (not necessarily the discussion) stalled out around a single question, so I will do my best to restate and clarify that question so as to focus where more evidence and argument is needed, should this be a conversation anyone wishes to resume. None of this is new, exactly, but it’s worth recanting given the importance of the question and the stakes surrounding it.
Around 1800 AD, living standards in some countries began to rise substantially, and over the past 200 years, that rise (as measured in GDP per capita) has been on the order of a factor of 50. This generally seems to correlate with other indicators of increased living standards to a degree that, with some exceptions (such as thinly-populated resource-rich countries) it is generally, though not universally, accepted practice to use GDP per capita as a good-enough shorthand for broad living standards. Whatever the case, exactly how and why this increase transpired is still a matter of debate, in no small measure because most people would find it desirable to replicate the phenomenon in those areas that have not yet experienced it. Indeed, some countries that did not begin experiencing the phenomenon in its initial emergence have experienced it since, leaving, essentially, three groups of countries – those who have experienced it, those who have not, and those in transition.
Piketty’s book, while not exclusively, overwhelmingly is focused on the first kind of country. A compelling portion of his narrative is documenting that transformation, yet the broader focus of the book is on what has transpired since that transformation was consolidated in the era following the Second World War. There are two key factors to be documented. The first is that the countries that have fully experienced this transformation are themselves not ‘complete’ in this regard – average living standards (recent economic troubles excepted) continue to rise and are generally, though not universally, expected to continue to rise in the absence of extreme calamity on the scale of global catastrophic climate change. The second is the change in the distribution of income – since a moment of ‘peak equality’ in roughly 1970, most of the countries Piketty analyzes have seen a sharp increase in inequality, the specific degree of which dependent on method of measurement but whose general contours is not really disputed. This, Piketty and many other believes, poses a problem for these countries that is not alleviable solely by continuing increases in average living standards or aggregate wealth and income growth.
Piketty devotes a lot of space to developing a simple model of how the aggregate quantity and distribution of capital can drive income inequality. This remarkably simple model requires only three input variables – the growth rate of the economy, the average return to capital, and the savings rate (perhaps better phrased as the rate of capital formation relative to national income) – to generate a long term prediction of two key ratios: the ratio of capital to income, and the capital share of national income. From there, wealth inequality can be used directly to compute a floor on income inequality – for example, if 1% of the population owns 50% of the national wealth and the capital share of income is 30%, then that 1% captures, at a minimum, 15% of national income.
And here we arrive at the crux of the debate. Piketty’s model implicitly assumes a certain exogeneity between those three input variables and the two ratios they converge towards, ie, that they are not inherently correlated with each other. This exogeneity poses a fragility in Piketty’s model and a challenge to mainstream economic theory. The fragility is that, if they are strongly correlated (in the direction such correlation is expected), and especially if there is iterative feedback between them over time, then Piketty’s model no longer produces outcomes in which wealth inequality drives income inequality. The key example here is the average return to capital; were it to fall in proportion to the rise of total capital accumulation, then the capital share of national income would be invariant to the quantity of capital, and thus largely undermine the mechanism by which present wealth inequality drives future income inequality. Furthermore, were this anticipatable decline in the in return to capital to drive a decline in savings, the capital/national income ratio would converge at a substantially smaller value than that projected by extrapolating from the initial period. This further depresses the likelihood of ever-increasing wealth-driven income inequality.
This is also precisely the challenge to mainstream economic theory. These correlations and feedbacks are precisely what are predicted by fundamental, strongly-held ideas about economics held by economists; most centrally that investment behavior is driven by that most central economic force, supply and demand. Piketty, however, is not simply laying down an alternative model, but an empirical challenge to this challenge. The most crucial assertion made by his model – that the return to capital fails to decline in proportion to the supply of capital – is not simply a theoretical alternative but one derived from the meticulously researched and calculated estimates in his unprecedented data. As I myself pointed out in my write-up of Piketty’s book, the data show that the return to capital is sufficiently resilient to its accumulation to justify Piketty’s model. At least, that is, without controlling for any additional factors.
And here is where debate stalled, with one side asserting that theory demands these variables be tightly correlated, and the other side responding that empirics demonstrates that they are not. The problem, of course, is that macroeconometric panel empirics is extremely sensitive to model specification, to the point of being perhaps the perfect example of how any decent statistically-versed researcher with strong priors can generate the outcomes from the data they which to receive. Certainly it is more than possible to generate a superfluity of complex models demonstrating the theoretically-predicted correlations, and these models will collectively have zero persuasive power because it is trivially easily to create as many or more equally-plausible equally-complex models that demonstrate the obvious.
Why does this all matter, to the degree it’s worth recounting in such detail to the tune of a thousand words? Because it strikes directly at the heart of the most important argument for tolerating high income inequality.
There are basically three arguments in favor of tolerating high income inequality, which I will attempt to summarize as fairly as I can.
- The ‘Just Deserts’ Position: incomes reflect the inherently just outcomes of markets. Beyond a certain threshold to prevent the worst form of miseries, it is therefore a violation of justice to take from the deserving and distribute to the undeserving.
- The ‘Pink Salt’ Position: income inequality is irrelevant except to the irremediably envious, resentful, or spiteful. What matters is preserving and increasing human happiness, which is largely driven by civil liberties, non-market institutions such as family and community, and the secondary impacts of economic progress.
- The ‘Golden Egg’ Position: income inequality may be ceteris paribus bad but aggregate economic growth is extremely good to a degree that in most plausible scenarios swamps income inequality. Furthermore, income inequality and economic growth may be conjoined outcomes of our economic system and cannot be modified independently. Therefore, we should be extremely cautious about attempting to alleviate income inequality through policies that slow the rate of economic growth, as this may reduce not just aggregate utility but the utility of those benefiting directly from redistribution.
It will shock nobody to hear that I reject outright the first argument in the strongest possible terms, and the second in quite strong terms as well. Indeed, I believe that the majority of Americans, and certainly the majority of voters in developed countries, disagree with those arguments as well. It is that third argument that gives pause to many – including, to a degree, me (though that pause is still far from convincing in my own case). The average person living in a developed country today as compared to a person living in that same country in 1800 is vastly better off, and it is not impossible to imagine that the average person living in a developed country in 2100 will be vastly better off than that average person today. Impeding our shared progress in that regard could simultaneously defer developments that improve the quality of most lives while simultaneously deferring developments (like innovation in renewable energy sources and storage) that could mitigate or reverse the worst consequences of economic growth to date.
This all converges on something of an ironic surprise. In this debate, it has been the left that has been advocating, implicitly or explicitly, on behalf of the resilience of capitalism (broadly defined) and its ability to deliver human prosperity, whereas it has been the right that has claimed, implicitly or explicitly, that capitalism and the prosperity it delivers is fragile, so much so that even increasing post-market redistribution (as opposed to pre-market regulatory redistribution through minimum wages, stronger protections for unions, and abridging the current rights and privileges of lenders and shareholders) could, to use a tired aphorism, kill the goose that lays the golden eggs. This ideological positioning isn’t wholly novel, and whether it is instrumental and ephemeral or representative of something larger remains to be seen; but it is notable, and worth pondering for what it says about the state of both the contemporary mainstream left and right movements in the United States (if not beyond).
“People respond to incentives.” That is a mantra, a shibboleth, a totem of economic thought that is various touted, invoked, and at the very least accepted by partisans of all sides and factions – it’s one of the core tenet’s of Mankiw’s textbook, for example. But getting beyond the fact that in some sense it’s a tautology, the statement strikes me, after some thought, as weirdly determinist.
One could, for example, create a model where “people respond to incentives” but what any given individual is incented by, or incented towards, is completely random – money could make some people vomit, while other people do ten jumping jacks every time they see a labradoodle. But that’s not what economists mean when they say “people respond to incentives.” What they mean is that there is some identifiable set of circumstances and stimuli that people will, in aggregate, respond to predictably.
Far be it from me to dispute this, at least directly – certainly you could imagine a world where the micro can seem random but the aggregate can seem largely predictable, but you could also imagine a world where forces outside that identifiable set of circumstances and stimuli have a sufficiently large and unpredictable effect on aggregate human behavior, and, further, interact with those circumstances and stimuli in volatile ways, thus at least partially rattling, if not undermining, the foundations of a system of thought based on those incentives.
What I really want to talk about is determinism. Because it is weird, at least a little, to me that some of the people who most vigorously and vociferously intone “people respond to incentives” as a devotional are the people who also most vociferously support “individual freedom” and voluntary action. It’s not so much that there is a contradiction per se as much as an odd combination of stress – why is it so important that as much of the human sphere as possible is structured to be voluntary if the effects of any given system are largely predictable?
What led me to this thought was Doug Henwood’s fascinating interview with Penny Lewis about the myth of the hard hat/hippie divide in which she refers to the post-Vietnam volunteer army as being the “economic draft.” Now this is, in some sense, self-evidently true – it is difficult to imagine a situation in which a volunteer army offering sufficient pay and benefits would fail to find recruits. But it also seems that it would be important to people to feel as though joining the army was voluntary on an individual level, regardless of the aggregate fact that the army will invariably recruit around the number of people it wants to assuming it knows how to set pay and benefits accordingly. My question: is the “voluntariness” of the army important because it increases efficiency (ie, recruits are self-selected rather than compressed at random) or is it because it is somehow just? What if you could create a non-voluntary system that guaranteed a similar level of efficiency (not that hard, when you consider that a decent chunk of enlistees have, er, ulterior motives) – would that be equally just to a volunteer army? If not, why is the voluntariness of the moment of enlistment so crucial? Wouldn’t it be more just, in some sense, to compress and pay less and thus tax less? Taxes aren’t voluntary.
This rambling inversion of Nozick’s Wilt the Stilt thought experiment doesn’t really go anywhere, but it is also worth noting that I stumbled upon this little essay on why leftists are necessarily determinists by Benjamin Studebaker. Notably, it goes wrong logically at precisely the moment it goes wrong factually:
The right very strongly disagrees with the left on this. Remember “you didn’t build that“? The right was furious about Obama’s claim that businessmen were not personally responsible for the success of their enterprises. Obama tried to back-peddle on the comment, but he had no business doing so, because “you didn’t build that” is precisely what leftists believe. Leftists don’t think that the rich are to credit for their success or that the poor are to blame for their failures. Leftists think sociological and natural forces determine who succeeds and who fails. People who succeed benefit from genetic advantages, better parenting, better education, more opportunity, more help from the state, and so on. People who fail lack these advantages and often possess their inverse–genetic disadvantages, bad parenting, bad education, less opportunity, less help from the state. To the extent that you are genetically gifted and enjoy a good environment, you succeed. To the extent that you are genetically shafted and suffer from a poor environment, you don’t.
Sigh. I am loathe to engage with anyone who presents any interpretation of Obama’s “you didn’t build that” comments other than the correct one for fear of engaging with someone deliberately uninformed or un-invested in good faith, but it’s worth explaining one last time, I suppose, that Obama’s comments were focused on something indisputable and very, very important – the intergenerational compact of public investment. Here’s how it works.
I am alive in some present. In the present, society has the capacity to produce some sum of material resources and intellectual discovery. Certain kinds of production – such as the production of pointlessly-large exurban houses in the Sun Belt or flat-screen televisions – are largely present-oriented and disconnected from future prosperity, while other investments – like building and maintaining transportation and utility infrastructure or scientific research – are largely-future oriented and necessarily divulge the vast share of their benefits to future generations regardless of how fast they convey present investment into future benefit. The Interstate Highway System, for example, certainly provided some benefit to those who were born during the Eisenhower administration, but assuming they are well-maintained could theoretically produce benefits to future generations ad infinitum.
Now, those benefits, while increasing net prosperity in myriad ways measurable and otherwise, do flow in lumpy ways. For example, if you founded a large trucking enterprise in the 1960s when the Interstate Highway System was just being built, you are likely really, really rich today. And if you, say, founded an internet shopping website when the internet was just getting started you, too, are likely really really rich today because of both public investment in making the internet possible and the highways that actually bring goods from fulfillment centers to homes at almost the speed of click.
This gets back to the argument Obama was making. Obama wasn’t making some puzzling point about entrepreneurs being winners of an arbitrary genetic and environmental lottery to justify their expropriation; he was making the very obvious point that many, if not all, of the people who are rich today are rich because past generations made sacrifices to invest in the infrastructure that made their success possible and therefore they should hold up their end of the intergenerational compact and help fund the public infrastructure of today that will create tomorrow’s broad-based prosperity and billionaire entrepreneurs alike. Nothing about this requires a belief ether way about determinism or free will, just the practical observation that quality public investment breeds prosperity which makes entrepreneurs possible (remember Woody Allen’s point about being a savannah tribesman) and the argument that those who benefited from past investment the most should probably pay a larger share of the costs of current investment for reasons of both fairness and ability. Therefore Studebaker’s conclusion that:
If we deny that the universe is determinist, there is no ground for objecting to the right’s argument that some people will themselves to success through virtue and others to failure through vice. If there is any other element, if there is any independent will, then some people really are fundamentally better people than others, are more deserving than others, and should be rewarded on that basis alone.
Is both incorrect and misses the point that that causes of why, say, Bill Gates or Steve Jobs got really rich is separate from the point that public investment in universities and computer technology and the internet and patent protection made someone getting really rich pushing forward the boundaries on computing all-but-inevitable and therefore whoever that someone is should help fund high-speed rail or whatever.
Noah Smith mused about a subject I’m interested in – the fundamental conceptual issues at the nature of saving – in a way I like to muse about it – thought experiments – so how could I not deconstruct his post in excruciating detail?
Specifically, I’d like to focus on the economy of his deer hunter (one of many, in his example, but just one for this purpose): a man who lives, alone, in the woods, hunting deer. I’m going to break this down as much as I can while abstracting away the non-deer parts of his economy (shelter, clothing, tools, etc). Because the deer hunter is an economy – and while he might be an economy of only one human, who we’ll call Vronsky -, we can productively and fruitfully view him as a vertically-integrated economy, and break him down into four sectors:
1) A firm that hunts deer. The firm locates as many deer as possible and kills them, then sells them to the next sector. It has most fixed costs (labor to hunt deer) and therefore pays relatively fixed wages, the rest collected as profit.
2) A firm that processes dead deer into venison. This firm always purchases all the deer killed by the first firm, and always sells all of its venison to the next two sectors. It has more variable wages (because it has variable labor as its primary input) and takes the rest as profit.
3) A firm that stores processed deer. This firm always buys all the surplus venison produced by the processing firm, salts it, and stores it until there is a market for it. We will discuss its economy in more detail below.
4) The consumer. It always buys a certain amount of venison (let’s call it C) no matter what.
Now, in actuality, all these firms are the same person – Vronsky, who owns all the firms, provides all the labor, and collects all the wages and profits (which he then proceeds to, largely, eat). But we can break the internal economy of his life away from Williamson-ian integration and imagine a market that works something like this:
There are flush years and lean years – periods, that is, in which D (the amount of deer caught by the hunting firm) is either greater than or less than C. Let’s see what happens in a flush year.
The first firm kills some amount of deer, D, that is bigger than C (we’ll call it C + S). It sells C + S deer to the second firm, pays its wages, and collects profit (let’s imagine the firm breaks even in years when D = C).
The second firm processes all the deer into venison, and sells C venison to the consumer and S to the third firm. This firm always breaks even because its labor varies in direct proportion to its production which varies in direct proportion to the available venison.
Now, the third firm. What should be clear is that the third firm is the closest this economy has to a financial sector – it buys venison when it’s plentiful and sells it when it’s, er, dear. This means it, essentially, stabilizes the internal price of venison (and also raw deer). It also is a very different firm from the other two, since labor is a minimal input – it is a capital-intensive firm that specializes in storage and market mastery (we’re assuming it inherits all the capital, physical and intellectual). Assuming our flush year is t=1, the firm has costs – purchasing the venison, salting it, and storing it – but no revenue. Which means it has to borrow. From whom? The consumer’s wages should always = C, so it must borrow from the profitable sector of the economy – the first firm, who has profited from a plenty of deer to kill. Essentially, the amount of raw deer necessary to produce an amount of venison = C costs exactly the wages of a year’s worth of deer hunting, and the wages of processing the deer into venison are equal to the mark-up of venison over deer, meaning all the profits flow to the first firm – the hunting firm. So it loans the money to the third firm, the storage firm.
This works in reverse in lean years. In a lean year (let’s say t=2 is exactly as lean as t=1 is flush, so C-S) the hunting firm is in the red, since it pays wages beyond it’s revenue. However, it can call in a loan from the storage firm, which has almost no costs incurred but suddenly tons of revenue from selling its surplus! So it can pay back the loan to the first firm. So there are now no net savings, nominally or physically. Balance. Om.
But let’s say there isn’t long-term balance. That creates two potential scenarios – one of long-term scarcity, whose end is obvious and really quite sad for poor Vronsky. But long-term plenty is more…interesting.
If there is long-term plenty, a couple things could happen. If we are speaking strictly ceteris paribus, then we would see larger and larger imbalances between the accumulated bonds of the hunting firm and the accumulated debt of the storage firm, ending in…financial crisis! Salted venison doesn’t last forever, so it would be essentially squatting on toxic assets it would be loathe to revalue without the projected revenue to pay off it’s accumulated debt. It would go belly-up, and basically need its loans forgiven – by which we mean, of course, that Vronsky has to write off a lot of old, stinky venison into the river.
But assuming non-ceteris paribusity, what we would actually see is that, as salted venison becomes plenty, prices decline to the point where no amount of hunting can support the wages of the hunting firm. To skip the boring stuff, what happens is that Vronsky consumes more leisure as he eats down his stock of salted venison and takes up whittling or something.
Now, over the truly long term, endless plenty absent productivity increases is impossible for Malthusian reasons unless you want to assume a Children of Men kind of deal. But even there, we wouldn’t see infinite saving because Vronsky would, sitting on a giant pile of meat, only hunt to the extent he wanted to, not needed to.
The key, in the end, is this – that saving is just as much about production than consumption, and it’s really about the future-orientation of production. In a world where Vronsky is alone, and has no reason to invest in future growth, he won’t endlessly stockpile venison because of diminishing returns and will therefore shift to other forms of spending his time. But in a world where Vronsky was future-oriented, at least minimally, he might spend his savings to create extra time he could use to develop more efficient hunting tools, thus saving even more time in the future. Or he could develop a game that would amuse him. Or he could pack a sack full of salt venison and go on a quest to find a friend, or at least a basset hound.
The real point, in the end, is that nominal savings (which always equal nominal debt) are very disconnected from whether current production is creating value for the future. In the 00’s we simply invested too much of our productive capacity in building overly-large houses in low-cost but low-value locations, which created a lot of nominal debt and therefore nominal savings but didn’t enable the United States to be more productive in the future. On the other hand, higher taxes that built high-speed rail wouldn’t show up as saving, but from the perspective of society, we would be deferring fleetingly pleasurable consumption of movies and candy and craft beer and what have you towards building valuable infrastructure that would make us richer in the future. That’s not nominal savings, and in the short-term GDP looks the same, but that’s true saving in the modern world.
Responsible prudent savers. Totally ants.
Scott Sumner, lingua in bucca, swapped Formica for granite countertops and writes:
PPPPS. Yes, granite is very durable, which makes it investment . . .
. . . and of course saving too!
This, of course, goes to one of my hobbyhorse points – the exceptionally fuzzy line between "consuming" and "saving." The better way to view the world, IMHO, is one in which, beginning at some arbitrary point, we apply our time and existing stuff, through the media of institutions, to make more stuff, and that stuff varies in function, quality, durability, etc.
This also reminds me of a tangential point – young people, on average, probably do not travel anywhere near the optimal level. Travel can be expensive, but when you are young there are two factors that mitigate strongly in favor of travel. Firstly, you are most able to enjoy it. Let me tell you right now that future 50-year-old me would have had a way tougher time enjoying Mehrangarh than the present 26-year-old me. Secondly, travel is a perpetuity, and while most of their utitlity is illiquid, that’s as much an advantage as disadvantage – nobody can expropriate, steal, damage, or tax it.
This is much the same as education, which is why education debt is a bad idea, but while a college degree can be so expensive most people simply cannot fund it out of current consumption, an unforgettable month-long jaunt through India for two can cost less than $5000 including airfare, adequate lodging, and all consumption. Which is a lot, but if you have a young cohabitating pair with no kids making at least a combined $70-80k, as long as their rent isn’t too expensive and neither is drowning in debt it’s perfectly possible to save adequately for such an adventure over less than a year. And you could make a very strong argument that traveling while young is just as much "investment" (in something that produces a lifetime-long flow of happy memories and increased knowledge and wisdom, as well as fun stories to share with others) as "consumption."
Humans like categories. And for good reason – they make the world computable. Unfortunately, they can have the side effect of predigesting the world for us, so especially when it comes to concepts that are wholly or mostly abstract, we should be doubly on our guard against firm deliniations against what is “x” and what is “not x.”
More often, “x” is better used as an adjective and not a noun, not a class of thing but property that a thing can have more or less of or be more or less consonant with. JP Koning is a terrific advocate for this approach, as he explains why is blog is called “Moneyness:”
The second way to classify the world is to take everything out of these bins and ask the following sorts of questions: in what way are all of these things moneylike? How does the element of moneyness inhere in every valuable object? To what degree is some item more liquid than another? This second approach involves figuring out what set of rules determine an item’s moneyness and what set determines the rest of that item’s value (its non-moneyness).
Here’s an even easier way to think about the two methods. The first sort of monetary analysis uses nouns, the second uses adjectives. Money vs moneyness. When you use noun-based monetary analysis, you’re dealing in absolutes, either/or, and stern lines between items. When you use adjective-based monetary analysis, you’re establishing ranges, dealing in shades of gray, scales, and degrees.
Not only do I wholeheartedly endorse this approach re: understanding money, I think the methodology should be expanded to all kinds of other things. For example – a feature of much libertarian thought is trying to decide whether or not something is “coercive.” I’m not a libertarian, but I am emphatically not trying to concern troll when I suggest a better avenue to pursue is trying to weigh whether different things are more “coerce-y” than other things.
This brings us back to “savings” vs. “consumption,” or “investment,” or “consumer goods” vs. “capital.” I really don’t like these distinctions, because as useful as they have often been in the past in the present they can often sow more confusion than anything else. I suggest we instead look at different goods having different levels of “saveyness” or “capitalness” – some goods last longer, some have more uses, some increase future productivity more than others. This applies to both the consumer side as well as the good side – ie, is a certain consumer decision “saving” or “consuming,” as well as is a certain good “consumption” or “capital?”
Think of a Twinkie. Twinkies are an odd product; on the one hand, they are a cheap, delicious, unhealthy snack; on the other hand, they are (at least according to legend) practically immortal. So is buying a Twinkie consumption or saving? Does it depend when you eat it? And for those who will say “but Twinkies aren’t an investment, they bear no interest, they just sit there” – so does money under the mattress, and nobody thinks that isn’t saving. More interestingly, from the perspective of the economy, for the most part it doesn’t matter what you do with the Twinkie. Obviously in the aggregate, if people buy lots of Twinkies for “saving” purposes as opposed to “consumption” purposes there might be fewer loanable funds, but if you were deciding whether to buy a Twinkie, stuff it in the pantry, and eat it in a year, or simply stuff a dollar bill in the pantry to buy a Twinkie a year from now, you’d still be saving the same amount…right?
Or think about what goods are “consumption” and which are “capital.” Got it? OK – is roasted coffee a consumption good or capital? Fine, that’s probably an easy one – since it only has a single use, it probably gets counted as consumption even though it is manufactured and increases productivity. What about a Keurig machine? What about my beloved ekobrew that allows me to turn fancy whole bean roasted coffee into a Keruig-produced cup of hot java? Are these “consumption” or “capital” goods? Does it matter if I’m a worker at a firm or a sole proprietor? If Google had a giant coffee roasting and producing operation at the Googleplex as a perk for their employees we’d probably call the equipment they used to make the coffee “capital” – so is it merely a question of scale? If I buy it on Amazon, is it automatically “consumption?”
I think these conceptual questions are inevitable if we continue to rely on heuristical categories that don’t tell us much about modern life. Instead, any time we discuss a social production decision, we should instead ask ourselves questions – what does the good do? What inputs does it require to do what it does? How long does it last? How much does it increase productivity and happiness? How much maintenance does it require? What is it replacing or displacing, if anything? Asking these kinds of questions will tell us things about the nature of what we, as a society, are producing that are much more valuable than traditional delineations. For example, I think the United States, as a society, should be building more high-speed rail. High-speed rail is very “capital-y” – it lasts a long time and greatly increases productivity. I would be willing to trade substantial amounts of “consume-y” goods – candy bars, video games, new T-shirts – in favor of building more high-speed rail. Of course, the GDP calculation will show that as “G” and not “S/I” assuming it is built by the state – but it represents a social decision to produce more long-lasting, productivity enhancing, future-oriented stuff than it was before at the expense of more quickly-depleted, pleasure enhancing, present-oriented stuff. In the aggregate, that’s what “saving” is. It’s not a question of “more” or “less” but “what?” and “why?”
See also this book.
Matt Yglesias and Tim Fernholz have both written great stuff about how US government borrowing is supporting US household deleveraging, a process Fernholz calls the “invisible bailout.” And they’re right, and for important reasons – as Yglesias says:
But when the household sector tries to reduce its indebtedness it needs to do something to make that happen. Stacking up huge piles of money in the closet is not a very sound method. As an individual, you don’t really need to think about this. You save by either lending money to your bank or else by purchasing a financial asset (stock, ETF, mutual fund, bond) from someone else. But that just puts the money in the bank fault or in someone else’s closet. Ultimately the money saved has to go to something.
What’s really interesting about that, though, is that it’s also true on a global level and not just a national one. One of Fernholz’s charts shows that the US has net-delevered even relative to pre-crisis 2007 levels. This should not only give a lot of pause to American austerity pushers, but austerity pushers everywhere. For if the US is net-saving, somebody else is net-borrowing. Europe? Maybe. But as austerity gets pushed harder there then that means either somebody else is saving less or some other party is borrowing more or both. Just like we can’t all be net exporters, we can’t all be net savers. In some sense, all saving is simply being the counterparty to someone’s borrowing (since saving is an attempt to push current consumption into the future and borrowing is the opposite) and therefore if you’re not affecting net global indebtedness you’re just squeezing the balloon. But net global indebtedness should be driven by the desire to save, not the desire to borrow – as long as the world is accumulating capital and is looking for some kind of store of value or investment return then they’ll find something, but in the absence of that you’re not going to magically find money to borrow. So the real question we should all be answering is “given the current global demand for savings how can we allocate that capital?” not “how can we reduce the federal government’s borrowing?”
I think this is all getting a little confused by the Euro crisis. Not being able to run experiments like this is what makes macroeconomics such a headache, but I’d bet dollars to donuts that on Earth-beta where there was never a European monetary union there is no debt crisis in Europe and most developed country would be currently borrowing at super-low rates, which is in fact what we see elsewhere.