Friday, December 21, 2012

PBS on Spending and Saving

Spending their way to joy and prosperity?

The PBS Newshour showed an interesting, although somewhat oversimplified and misleading, segment on the spending vs. saving dilemma. Considering this question from the perspective of holiday buying, Newshour reporter Paul Solman looked at whether the health of the economy requires consumer splurging or austerity and saving. He identified the splurging side with the ideas of John Maynard Keynes and the austerity side with those of Friedrich Hayek. James Livingston, an economic historian at Rutgers University and author of the book Against Thrift, represented the supposedly Keynesian demand side, arguing that economic growth over the past century has been driven primarily by consumption and that private investment has been dropping as a percentage of the economy since the 1920s. Solman’ s brief interviews with shoppers and storeowners provided less theoretical support for spending. The savings argument received less backing, since PBS did not have an authority to counter Livingston, or individuals to testify about the benefits they received from thrift and investment. The program did explain the logic behind the savings side, though, explaining that delaying consumption can create greater productive capacity and enable future prosperity. Solman did, moreover, raise the question of debt with Livingston. 
James Livingston

The Newshour presentation is oversimplified, I think, because production and consumption are really not mutually exclusive choices.  At the beginning of modern economics, Bernard Mandeville and Adam Smith recognized what Keynes would later call “the paradox of thrift,” the idea that if everyone saves and invests and no one spends, there will be no market for goods and therefore no profit for investors. Hayek and the thinkers associated with him have also recognized the importance of consumption for an economy, concentrating on the importance of increasing investment in production of goods that will be purchased.

The argument of Keynes was that productive capacities had outpaced consumption and economic downturns were therefore due to overproduction and underconsumption. Modern industries, according to Keynes, were pushed by their productive capacities to outgrow markets for goods. When this happened, industries would cut back on production and lay off workers. Unemployed and underemployed workers would lack buying power and this would further diminish demand, causing businesses to cut back even further. The Keynesian argument for governmental deficit spending was that government could boost demand so that private businesses would restore unused productive capacities and re-hire workers. The deficits incurred in difficult times would, presumably, be paid off through economic growth.

The Keynesian view, although influential, has not been universally accepted. Milton Friedman and Anna J. Schwarz, for example, argued in their 1963 book A Monetary History of the United States that the Great Depression was a product of tight monetary policy preventing recovery from a temporary decline in activity, rather than a crisis of overproduction. Keynes did, though, recognize the importance of production and private investment, arguing that subsidizing demand could pull forward investments in industries. In both the Keynesian and more libertarian approaches, the question was not one of spending replacing saving, but of how to achieve the proper balance between spending and saving and of what role government should play in achieving that balance.
Now, in our present situation, I think our difficulties are the reverse of those that Keynes believed caused slumps, and this is precisely the problem with arguing that we should bring back the economy through spending. The very historical pattern James Livingston described in the program, the reliance on consumption as an engine of growth, has resulted in an economy in which consumption has outpaced our productive capacities. We do not face overproduction and underconsumption, but overconsumption and underproduction. It is a debt-driven economy. Solman raised the problem of debt, but only as a matter of government debt that could, theoretically, be resolved by economic growth increasing government revenues. Government debt is only part of our difficulty, though. Our economy has also become increasingly dependent on consumer debt, often subsidized by government debt. The kind of growth created by consumer debt is inherently unsustainable because it creates neither a present balance between production and consumption nor a plausible future balance between the two.

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