Friday, November 13, 2009

Turn America into a nation of savers

The Christian Science Monitor's opinion editorial "Turn America into a nation of savers" (November 9th, 2009) wishes for the U.S. savings rate to go up.

Deciding that America needs to save, Mr. Cramer advocates government spending:

For the next few years, we should expect the federal government to continue to spend more than it takes in. This will be a good thing as it solves the troublesome "paradox of thrift," where reduced economic prosperity leads to sudden declines of consumer spending, which accounts for two-thirds of the economy.

But once the economy recovers, a high savings rate still will be essential to financing the investments American business must make to improve efficiency and avoid the looming prospect of inflation. And the more Americans of all classes save, the less dependent the country becomes on foreign creditors to buy our debt.

1) This article implies that savings are good. No course in economics would dare to make such a claim. If not saving makes people happy, then they shouldn't save!
2) The existence of a "paradox of thrift" is not clear. A fall in consumption and increase in savings will cause both prices to go down and interest rates to go down, both of which encourage consumption. Unless we believe in a multiplier, there's no paradox.
3) Ricardian Equivalence should take place when it comes to simultaneous government spending and consumer saving. The governmental budget constraint is the aggregate consumer budget constraint.

The only Paradox of Thrift that Corrections can see is the Paradox of consumers spending more (as individual taxes raise) while saving more (as individual bank accounts rise).

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