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America’s Lost Decade

This article was written by in Economy. 10 comments.


Larry Summers, former economic adviser to Barack Obama and Treasury secretary under Bill Clinton’s presidency, shared his thoughts on the economy through opinion pieces in the Financial Times and Washington Post. His concern is the possibility that the United States is heading for a “lost decade” similar to Japan’s lost decade in the 1990s. This country has already experienced five years of economic growth under 1 percent annually, and that’s half way to a decade. Summers argues that while changes in policies helped prevent total economic disaster in 2008 and 2009, the economy needs more stimulation right now to prevent the history of one side of the globe from repeating on this side.

He is calling for more infrastructure spending right now. The country’s infrastructure is quickly becoming obsolete, and a stimulus package that focuses on infrastructure maintenance and replacement at a time when financing is cheap would increase the level of employment and grow the economy. When the major stimulus package was developed, it was designed to focus on “shovel-ready projects,” the same type of infrastructure improvement that Summers is calling for now. Obama warned of a lost decade in 2009, when trying to sell Congress and the American public on the first stimulus package. What happened to that first stimulus? I know that stimulus funds supported local road and bridge improvement projects near me — some of which were started years ago and are still far from completion.

It must not have been big enough or agile enough. While the stimulus most likely helped to prevent a larger economic problem, we’re still heading towards a lost decade.

Larry Summers offers these suggestions for moving forward and sparking the economy.

This is no time for fatalism or for traditional political agendas. The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies [austerity measures, inflation protection[, no matter how apparently appealing or effective in normal times, will be futile at best…

Without the payroll tax cuts and unemployment insurance negotiated last autumn we might now be looking at the possibility of a double dip. Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees.

Politicians are going to have a tough job convincing the country that more taxpayer money should go to stimulating the economy, the government should continue spending, and more federal debt is acceptable even at these low interest rates. Yet, if the economy struggles for another five years, global investors will lose interest in investing in the United States, and the country could find it difficult to survive economically against other nations’ economies.

Japan also introduced economic stimulus policies to try to recover from that country’s Lost Decade starting in 1991, but that country’s economy still hasn’t found its way. The economy in that region of the world is being fueled by other nations, where labor and parts are cheaper. When we look at Japan, China, Taiwan, and Korea, we may be looking to our own future, regardless of any new stimulus programs. This just might be a new reality, where economic growth comes from emerging nations.

Financial Times, Washington Post, Wall Street Journal

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The Paradox of The Paradox of Thrift

This article was written by in Best Of, Saving. 17 comments.

If you’ve been paying attention lately, you might have heard that throughout the economic recession, Americans have been saving more of their income. Some economists worry that saving, while good for the individual, can be harmful to the economy as a whole. This is commonly called, “the paradox of thrift,” a theory developed by John Maynard Keynes, a popular economist who in the early 20th century saw spending as the basis of an economy.

Keynes looks at a recession as a vicious cycle, illustrated here:

  1. Less money is being spent by consumers.
  2. Demand for products and services decreases.
  3. Businesses reduce production and eliminate jobs to meet demand.
  4. Unemployment increases, resulting in less income for saving or spending.
  5. Rinse and repeat.

In this model, it is theorized that saving more money can eventually result in having less money to save on an aggregate level. The only thing that can break this cycle is something external. In our case, it is the government. The first treatment was “stimulus,” payments given to taxpayers (from current or future tax receipts) to help “stimulate” the economy.

The reaction, when this didn’t work, was that this wasn’t enough to break the cycle, and more stimulus was needed to noticeably affect the economy. The government decided to go directly to businesses, providing them with the capital needed to finance shovel-ready projects, hire more employees, and keep aggregate income up so consumers would feel that their money is better spent spent.

The easiest argument against the validity of the paradox of thrift is that, for the most part, there is no such thing as saving money. Money is either spent now or it is spent later. Another possibility is that it is invested now and transferred to a business, and the business either spends it now or spends it later. When you decide to spend money later, in almost all cases, you put the money into a bank account, which provides the bank with more funds with which to provide loans to businesses now.

As long as banks to continue to loan out money, the economy doesn’t decline. But as we see now, thanks to the “credit crunch” (which we haven’t been hearing about as much recently), that’s not happening.

In short, it’s not consumer spending or saving, but the financial industry’s refusal to lend money to credit-worthy businesses that is keeping us amidst the recession.

The paradox of thrift, the idea that saving more money was bad for the economy, was invented when personal rates of saving were much higher and consumer credit was all but nonexistent. At this time in American history, “saving money” meant keeping cash under a mattress outside of the banking system. Perhaps the paradox of thrift was a reality at that time, but despite its popularity in the news recently, it probably no longer applies to America’s modern economy. Many economists now agree that this aspect of Keynesian economics has seen better days.

Does the government need to step in to break the cycle, like Keynes suggested? Probably, but it needs to take the right actions. Helping tax payers with $400 over two years is not enough because it doesn’t have a large enough effect for the majority of Americans in order to restore consumer confidence.

The economy is broken at the lending level, and that’s where the government should focus. Banks need to lend money to credit-worthy customers. If they refuse, the government can step in, and they have a number of options, with approaches ranging from near-socialism to capitalism, including:

  • buying the banks, nationalizing the industry, and changing the way banks do business
  • buying controlling shares in the banks and making management decisions to lend (responsibly)
  • investing in the banks with the requirement that the money be used to increase lending
  • providing tax incentives for institutions that decide to increase responsible lending
  • creating a federal bank that accepts deposits and lends its funds to compete directly with private banks

Continue to save money and spend less than you earn. It’s not a patriotic duty to spend it on products and services you don’t need, despite what you might hear. There is no need to sacrifice your future financial well-being for the sake of the greater good. It wouldn’t work, anyway. The economy will be sorted out with or without the house you buy now rather than a year from now.

Some interesting reading on the paradox of thrift: Paradox of thrift on Wikipedia, Frugal living is bad for the economy from Associated Press, Consumers Don’t Cause Recessions from the Mises Institute, and The Paradox of Thrift: RIP from Cato Journal.

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Stimulus Watch: Track Federal Funding of Local Shovel-Ready Projects

This article was written by in Economy. 8 comments.

Once the stimulus bill is signed into law, states and cities will receive funding for local shovel-ready projects that may help stimulate the economy. The Stimulus Watch website has compiled all of these projects and is presenting them in a way that allows visitors to browse, search, and participate. The website contains a wiki, inviting citizens to review and comment upon any of the projects with which they are familiar. You can also cast a vote for each proposed project, resulting in a score that would determine how critical that project would be for the economy.

For example, the least critical project as voted by website visitors right now is a proposal described only as “doorbells” in Laurel, Mississippi.

The site also includes the each project’s cost to taxpayers. The most expensive project on the list is a plan to create energy efficient industrial zones in Cidra, Puerto Rico, at a cost of $17.5 billion.

Each project also contains an estimate of the number of jobs that would be created. A project to convert Los Angeles’s power needs to renewable energy sources, at a cost of $2.16 billion, would create 31,243 jobs.

Note that not all of the projects on this list will receive a grant from the stimulus bill. This is a “wish list” created by representatives across the United States (and apparently its territories), resulting from a meeting of the U.S. Conference of Mayors.

Check it out.

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