* yes, yes, I know. Supposedly the answer to this is that we'll fix the structural problems later, etc, etc, but right now we need to be jolted out of Depression. Maybe so.
UPDATE: A previous post from me on this. Short and unsubstantive, but I link to remind myself I have been thinking about this for a while. This, by the way, is a serious problem even in (or maybe especially in, since we have the ability to save truly disposable income) the upper middle class stratosphere of big law firm practice. People (especially people who got through law school romantically unattached) typically start spending like drunken sailors as soon as the first paycheck clears, and then wonder years later why their debt isn't gone.
UPDATE 2: I note that Paul Krugman has the following to say on exactly this topic:
"Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now."
14 comments:
Yes, that's the idea: as a long term strategy, people should save and be careful of spending, but during a downturn they need to increase spending and not worry about saving. Be American in a recession and Japanese the rest of the time.
PG - Right, but what if in the downturn, despite your efforts to spur the economy by spending lavishly, you're laid off? Who will help you then? Isn't it better for all of us to take our lumps and reset the economy on a responsible footing?
I'm not sure that a person who, say, gets a salary to build a bridge who would otherwise be unemployed should be characterized as being stimulated into profligacy.
For us, "taking our lumps" means getting a half-Skadden. That kiboshed any expensive winter vacation plans for me but didn't affect my ability to pay my rent. When "taking your lumps" means being hard-pressed to buy groceries or pay for your prescriptions there are broader social goods implicated.
Sarah - But I was addressing the supposed crisis that our savings rate is trending upwards - i.e., people who by definition are doing at least ok, because they have some money and are now saving it instead of spending. All I'm saying is that there is an argument to say that we should let economic demand reset at a lower level, and utilize our safety nets, expanded as needed, to soften to blow as much as we can, rather than trying to get people to empty out their savings. This has nothing to do with the people who are being pushed to buy groceries or medicine at all becauase, ironically, they are being good citizens by shaking out their last cent.
Raffi,
So far as I know, people aren't being encouraged to empty out their savings. Rather, there's a concern about a quasi-irrational thriftiness among people who haven't had a significant decrease in disposable income. I call it quasi-irrational because it is rational for the individual but irrational for the system. My paycheck is the same this month as it was when I started last year. If I'm fearful that my husband or I might become unemployed, however, I start reducing my spending and building up my savings. If a lot of people do this, the unemployment becomes a self-fulfilling prophecy for the economy as a whole.
As for the spending done by working class and lower-middle class people, that's what a stimulus ought to be directed toward: people who can't *afford* to save the money they get from the government, and who therefore will spend it quickly. Send *me* a rebate check and I'll put it in my savings account while I wait on clearance from my firm to invest it.
PG - I agree on where stimulus ought to be directed. On your first point, though, my argument is that the "quasi-irrational thriftiness" is actually what both our society and individuals should always have been doing, and thus any stimulus directed at people to shake them out of that position ends up as an effort to revise a decade long binge. It's like methadone - maybe necessary, but not ideal.
"revive" a decade long binge, I should have said.
Also, PG, as far as I can tell, it is about forcing people to spend their last cent. I heard yesterday some economist who said that even a rise to a 3% national savings rate would be *calamitous* to the economy. 3%. His point was that we need to sustain the 0% or negative savings rate of the past decade. That doesn't seem like the right answer to me.
What PG said.
I'm not entirely sure why you are linking supposed "profligacy" and "lavish spending" by individuals with the stimulus package. The stimulus bill surely isn't designed to encourage you, me, or PG to go buy giant blocks of jamon iberico, and it won't directly deter us from "quasi-irrational" savings, if that is what we're doing.
Sarah - Well, I'm linking it because it is meant to stimulate profligate and excessive spending. Or how else do you explain the 15,000 homebuyer (actually homeseller, of course) tax credit, or the car buying tax credit, among other things.
Raffi,
As my husband noted, at the price we'd be paying for a home (even if we hadn't bought a home already and rendered ourselves ineligible) because we work in Manhattan, $15K is a drop in the bucket -- we paid that much in points to lock our interest rate when we bought two years ago (yes, we feel mind bogglingly stupid now). $15K only makes a behavior-shifting difference to home buyers in the income levels where most of the stimulus ought to be directed. In other words, people who are buying homes in the $150k range, which isn't really profligate, McMansion with granite countertops range.
PG -But that's exactly my point, no? It is going to change the behavior of people who, looking at it rationally, should probably be renting. Or buying a 100,000 house. Instead, we're supporting price levels of houses that will drop once the stimulus dries up.
Raffi,
No, I don't think the people who are buying based on a $15k tax credit ought to be renting, especially right now with home prices low. When we were in a housing bubble, we probably should have retrenched on some of the benefits to homebuyers (such as the mortgage interest deduction) in order to deflate the bubble slowly. However, I'd say at this point we've probably finished the price correction and may even be in a deflationary phase, in which case encouraging people to buy is a good idea -- they're getting homes at a good price, and the bump to demand will help home prices and reduce the impetus to abandoning homes and underwater mortgages.
PG - I think we just disagree on this point, then. I think people are exceptionally bad at figuring out the rent v. buy scenario, and make mistakes more often than not on the side of "buy".
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