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Department of "No"!
Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us... They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.
That's Robert Reich, here is much more. How shall I put it? Savings are good for the economy! Savings are invested! (and this is about the long run) Arguably Americans don't save enough! America is a net importer of capital, not a net exporter!
Etc.
Addendum: This, from Barack Obama, belongs to the same department.
Posted by Tyler Cowen on February 13, 2008 at 05:20 PM in Economics | Permalink
Comments
If you are looking for short-term stimulus, increasing spending in the short-run would be helpful. If you are looking for long-term growth, you need both investment capital and consumers to buy that which investment capital helps produce.
Posted by: richard at Feb 13, 2008 5:46:34 PM
I want to see Robert Reich debate Suze Orman.
Posted by: 8 at Feb 13, 2008 5:49:46 PM
Reich appears to be an old-time Hanson-type Keynesian in his column. I was bothered that he would recommend trying to increase the spending by people who already don't save enough.
And I wonder whether he would propose taxing those very people to choke off their spending if the threat of inflation grows.
Posted by: EclectEcon at Feb 13, 2008 6:14:13 PM
Rich says increase spending in the short-run to help the economy. I agree we should increase spending on investments that earn interest; increase the productivity of workers, which increases their wages; and put people to work. Let's increase spending on capital goods and decrease spending on consumption goods.
Posted by: tom at Feb 13, 2008 6:32:31 PM
"It's a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart"
That Obama comment is so breathtakingly stupid it almost makes me nostalgic for the demagogic skills of John Edwards.
1. force?
2. walmart is way above min wage
3. employment at wal-mart is nothing to do with nafta
4. this completely ignores the benefits of low prices to many more
5. maybe parents should have built extra skills instead of having babies they can't afford
6. he's fretting about increased competition from low-skilled workers, and also wants to open new avenues for them to immigrate to the country?!
Posted by: Chris at Feb 13, 2008 6:42:55 PM
I disagree that Obama's comment was stupid, in fact I think he's right on. NAFTA allows large companies to ship their goods to the US from Mexico and Canada largely tax free. Though the intention of the bill could be debated, what has happened is that US companies were able to move their manufacturing processes to Mexico and utilize their cheaper labor.
And the problem isn't just for American workers.
Brad Delong quoting The Economist http://econ161.berkeley.edu/movable_type/archives/001178.html:
But local farmers are still going out of business because their costs—from diesel to electricity to credit—are about a third higher than those north of the border. Poor transport makes a crucial difference: it costs about three times as much to deliver corn by rail from Sinaloa to Mexico city as it does to ship it there from New Orleans via Veracruz.
So who wins in this? Big American businesses. Not American workers. Not Mexican workers. Just those who are already rich.
Posted by: John at Feb 13, 2008 6:59:49 PM
I disagree that Obama's comment was stupid, in fact I think he's right on. NAFTA allows large companies to ship their goods to the US from Mexico and Canada largely tax free. Though the intention of the bill could be debated, what has happened is that US companies were able to move their manufacturing processes to Mexico and utilize their cheaper labor.
And the problem isn't just for American workers.
Brad Delong quoting The Economist http://econ161.berkeley.edu/movable_type/archives/001178.html:
But local farmers are still going out of business because their costs—from diesel to electricity to credit—are about a third higher than those north of the border. Poor transport makes a crucial difference: it costs about three times as much to deliver corn by rail from Sinaloa to Mexico city as it does to ship it there from New Orleans via Veracruz.
So who wins in this? Big American businesses. Not American workers. Not Mexican workers. Just those who are already rich.
Posted by: John at Feb 13, 2008 7:01:14 PM
John-
You are saying that its better for Mexican workers in Mexico City to pay 3 times as much for corn? I think they might disagree and they might think that reducing the price of their food under NAFTA is a real benefit.
Posted by: guy in the veal calf office at Feb 13, 2008 7:16:46 PM
You get the distinct impression Reich thinks that if people buy things just to burn them in bonfires we will all be better off.
The ideal plan along these lines would be large government-run bonfires. Bring your goods and your receipts showing you bought them in the last 30 days, throw the goods on the fire, and exchange the receipts for one from the government for use as a tax deduction.
Posted by: MikeP at Feb 13, 2008 7:40:49 PM
I think polls show Americans growing skeptical about globalization. It could be that a pendulum-swing in rhetoric is natural. The question for me would be how far the pendulum can swing in actual trade law? I bet not much.
Posted by: odograph at Feb 13, 2008 8:28:45 PM
Why can't the Say's Law fundies see that you can create all the capacity you want in China, but it won't help Americans unless they have the INCOME to buy it. Where do they get the income? From telecommuting to China?
Picture an America where Bill Gates and Warren Buffet have all the income. They have no marginal utility for the millions of cars, houses, suits, cases of beer and football tickets to keep the economy going. The only way to keep the economy going is to loan the masses billions of dollars. The Chinese, Japanese and Middle Eastern countries have been doing just that as wealthy American investors export their productive investment to China, thereby hollowing out the economy and further eroding real income.
The paradox is we need sticky wages to fall to attract productive investment back to the U.S. If the wage rate paid by corporations is supplemented by the government (by progressive taxation), that's one way to approach the sticky wage problem and perhaps the need for welfare itself!
Posted by: ideogenetic at Feb 13, 2008 8:42:45 PM
Based on that comment, I think it would be fun to play chess with Robert Reich: clearly, he has trouble seeing beyond the next move. When the rich invest their money, it doesn't just sit there. It gets spent, just by someone else! In fact, where does he think companies get the money to pay their workers wages, which are then spent on other goods and services? Duh: investors!
Posted by: Ari at Feb 13, 2008 9:14:21 PM
Some spot on comments by ideogenetic, I think it helps to consider a basic Heckscher-Ohlin model. Free(r) movement of capital between Mexico and America causes wages in mexico to rise, and wages in america to fall. The big winners are American employers/renters, and mexican workers. Overall, free(r) trade hurts American consumers.
This is because the increase in working population drives down wages and the increase in aggregate demand offsets the firm's ability to lower prices. This means little change in price for goods, and falling wages. This loss of real income is exactly what I believe Ideogenetic is mentioning.
The problem isn't actually NAFTA though, it's just that human capital migrated faster than the market could respond (such as creating more jobs). The market will correct itself, of course. But it may mean a change in America's terms of trade.
Posted by: Apachethetic at Feb 13, 2008 9:19:49 PM
Free(r) movement of capital between Mexico and America causes wages in mexico to rise, and wages in america to fall.
Yes, in comparable industries. Thing is, America has a lot of industries that don't compare well to Mexico, such as software engineering.
Posted by: Joshua Holmes at Feb 13, 2008 9:37:27 PM
Apparently Obama is to economics what Mike Huckabee is to evolutionary biology.
Posted by: Keith at Feb 13, 2008 9:44:42 PM
When you exchange your dollars for Remnibi, some guy in China gets your dollars. These dollars can only be spent on American goods and services. And if he doesn't spend it on anything, instead wallpapering his house? Even better... we just got some free Remnibi. The value of every dollar increases in proportion to that dollar that was thrown away.
Posted by: Cliff at Feb 13, 2008 9:56:07 PM
We "save" exactly the right amount for the prodcutive needs of the U.S. If more were required, as it has been in times past, and may soon again be, it will be forthcoming, sua sponte.
Intermediation (transaction cost) that is still rampant in the "high savings" perimeters has been substantially reduced here, and another whole layer recently self-employed in the fabrication of variations in financial instruments is about to be redirected out of that funcrtion. Bless Jack Dreyfuss - anybody remeber what he did? Try money market funds - $1 = 1 share. Beat the old "Savings Accounts." That was only part of what has happened, and will continue.
We do not "import" capital. If we did, it would be priced like other goods and resources. We import labor and resources. Others store the excess of the returns on their labor or resources here, where it can be tied to the most productive uses in great safety.
There is no "capital flight" is there?
Posted by: R. Richard Schweitzer at Feb 13, 2008 10:20:01 PM
Sure, savings=investment is the accounting identity, but this looks to me more like a problem in the supply of recognized profitable investments, not lack of funds. If there's one thing we've learned from the dot-com bubble, the housing bubble, and your average hyped-up technology stock, it's that for investments that appear to be profitable, plenty of funding becomes available. This makes it hard to take seriously the folks who say Americans don't save enough. Where are all the profitable projects that aren't getting funded due to lack or cost of funds? Why did financial markets go for risky subprime loans if there are better opportunities available? My guess is that the gating factor is more often the confidence that an investment has enough potential to be worth the risk.
For example, one limiting factor might be the willingness of governments to fund infrastructure projects using bonds that will be paid off later with taxes. If it grows the economy more than the cost of the project, it's a net win, but you wouldn't know it from the politics. Politicians who can convince Americans to invest more in common infrastructure might make a difference.
Posted by: Brian Slesinsky at Feb 14, 2008 12:36:21 AM
(Closed italics tag)
"Some spot on comments by ideogenetic, I think it helps to consider a basic Heckscher-Ohlin model. Free(r) movement of capital between Mexico and America causes wages in mexico to rise, and wages in america to fall. The big winners are American employers/renters, and mexican workers. Overall, free(r) trade hurts American consumers."
As another commenter said, it only happens in the same industry. T-shirt makers in China have been doing a lot better while a t-shirt maker in America. But who here makes t-shirts for a living?
In reality, the supply of workers in that particular category goes somewhere else. Just about all of our great-grandparents probably grew up farming, working in factories or doing some kind of manual labor. We eventually learned how to either automate those processes or facilitate under-utilized ("cheap") labor to do them overseas.
If you're closed-minded and think making t-shirts must pay a decent wage in America, you wouldn't like the result of this process. But for those willing to go into the new fields demanded by both American consumers with lower costs of living and foreigners with higher wages, the payoff is tremendous.
Posted by: Matt at Feb 14, 2008 2:37:27 AM
I'll do everyone a favour and close the italics tab. I feel better now.
Posted by: Ross Parker at Feb 14, 2008 4:13:22 AM
I'd be willing to cut Obama some slack. He's a public figure and his every word is recorded. Even economists writing on their blogs sometimes make outrageous claims. I once saw a GMU economist claim there was no housing bubble! ;-)
Posted by: MostlyAPragmatist at Feb 14, 2008 5:41:37 AM
OK, the Mexican rail system sucks.
Why isn't this an investment opportunity on the grand 19th-century scale: thousands of poorly-paid workers with sledgehammers and dynamite, a few tunnel-boring machines bought in from Switzerland, a hundred kilometres of tunnels blasted through the Sierra Madre Occidentale and viaducts soaring over the valleys down to the central plains? Get the infrastructure in, it'll cost on the order of five billion Euros, and sit there gathering in three Euros a passenger and three Euros per ton of freight, and spending half a billion euros a year on maintenance, until people no longer want to cross the mountains.
Posted by: Tom Womack at Feb 14, 2008 6:00:55 AM
How about this:
The American savings rate is low because middle and lower income americans aren't saving enough. These people need to be encouraged to save more.
The wealthy have excess money and so they save. We can either let the market turn this into investments or we can tax their excess wealth to invest in public goods such as infrastructure, education and research that have long term payoffs for the entire society. I guess some of this provides some direct economic stimulus but not very much.
Posted by: Boris at Feb 14, 2008 8:52:24 AM
Savings rate is limited to certain instruments isn't it? The rubber will meet the road when some net-worth census is done (after the housing bubble settles). If median net worth grew then people effectively saved/invested.
I sense though that too many people are carrying too much debt to much grow their net worth.
Posted by: odograph at Feb 14, 2008 9:04:34 AM
I'm reading all these claims about the Us not saving enough and a lack of investmetn ideas, etc., etc., etc., yet no one seems to bring up the price of capital.
Around 1980 -- when the US begin running a structural trade deficit and importing large sums of capital -- real interest rates rose sharply and have remained much higher ever since.
If all the above comments are true there should not have been a structural shift in US real interest rates around 1980. The much higher levels of real US interest rates since 1980 strongly implies that the above comments are all incorrect.
i'm sure it will be interesting watching everyone explain why i'm wrong.
Posted by: spencer at Feb 14, 2008 9:20:12 AM
Spencer, I do not know you to give you a theoretical answer, so I am forced to give you a practical one. Let's start with a blast from the past:
"After growing rapidly during the boom of the 1990s, the net worth of the typical American family rose only 1.5% after inflation between 2001 and 2004, the Federal Reserve said in an update of a survey it does once every three years.The Fed said the net worth of the median American family -- the one smack in the statistical middle -- was $93,100 in 2004. Net worth, the difference between a family's assets and liabilities, rose a robust 10.3% between 1998 and 2001 and 17.4% in the three-year interval before that.
A booming housing market boosted the typical American family's wealth between 2001 and 2004, but stagnant stock prices and rising debt offset many of those gains."
And then let's ask, what happens when we erase those housing gains - while keeping the new housing debt?
Posted by: odograph at Feb 14, 2008 9:59:27 AM
Without savings, how can we make unscrupulous sub-prime mortgage loans?
Posted by: Vin at Feb 14, 2008 10:21:14 AM
"When the rich invest their money, it doesn't just sit there. It gets spent, just by someone else!"
I'm amazed that all you economics geniuses miss this one: but here's a clue -- the rich can and will invest that money overseas (especially in current conditions), where it does the US consumer/worker precious little good, if any.
Posted by: M1EK at Feb 14, 2008 12:01:29 PM
Spencer,
Low savings (government and trade deficits) raises real interest rates because demand for borrowing rises, right? Plentiful savings means lower real interest rates.
Posted by: ideogenetic at Feb 14, 2008 12:11:08 PM
How does Japan's monstrous savings rate help her economy?
Posted by: djg at Feb 14, 2008 1:12:49 PM
the rich can and will invest that money overseas (especially in current conditions), where it does the US consumer/worker precious little good, if any.
Because, as we all know, dollar bills are made of special paper that evaporates once it crosses the national border.
Posted by: MikeP at Feb 14, 2008 1:49:29 PM
You get the distinct impression Reich thinks that if people buy things just to burn them in bonfires we will all be better off.
I also get the distinct impression that I'd get better economic advice from Steve Reich.
Posted by: MattXIV at Feb 14, 2008 4:12:56 PM
"Because, as we all know, dollar bills are made of special paper that evaporates once it crosses the national border."
The claim all the supply-siders and their enablers make is that rich people will invest their savings in this country which leads to people in this country getting jobs and other benefits. If they instead spend that money investing in a factory in China, let's say the job benefits for the US are likely to be less than zero.
Posted by: M1EK at Feb 14, 2008 5:38:39 PM
Cliff already made this point, but what in heaven's name do you think factories in China do with those dollars? They either (a) use them to buy American goods and services, (b) use them to invest in the American economy, (c) hold onto them, making the dollars American workers have worth more, or (d) trade them to someone who will do one of (a), (b), (c), or (d).
Even if they use them to stoke their fires because the paper and ink is cleaner than coal, the US can then print up more dollars and hand them out to whatever American workers you imagine need them.
Posted by: MikeP at Feb 14, 2008 5:53:59 PM
spencer, pardon me, but what the hell are you talking about? Real interest rates are *high* now?
Let's see, 10-year treasury ... 3.8%
Inflation ... 2.4%
Wow, a 1.4% real interest rate *sure* is high, isn't it?
Posted by: Person at Feb 14, 2008 6:20:37 PM
As a Barack Obama fan, but also a free trade fan, I hope Obama is really not as anti-trade as his rhetoric suggests. There are certain political issues, it seems, where politicians have to take a certain dubious position to be viable because there are powerful interest groups that can and will make you pay if you don't toe their line. Israel is one. Free trade seems to be turning into another, at least for democrats.
Can he be honest about free trade and win Ohio on March 4? It seems unlikely, so there is this dilemma. So I'm hoping he's just saying this because he has to, but doesn't really believe it. What does that Goolsby fellow that advises him on economic issues think, I wonder?
Posted by: Tim at Feb 14, 2008 11:52:50 PM
As a Barack Obama fan, but also a free trade fan, I hope Obama is really not as anti-trade as his rhetoric suggests. There are certain political issues, it seems, where politicians have to take a certain dubious position to be viable because there are powerful interest groups that can and will make you pay if you don't toe their line. Israel is one. Free trade seems to be turning into another, at least for democrats.
You've got to love a political system that demands politicians be economically illiterate or dishonest.
Posted by: Robbie at Feb 15, 2008 1:03:45 AM
John,
If you think US farmers are going out of business look at the front page of the WSJ today. Times have never been better to be a farmer than today.
Posted by: asiequana at Feb 15, 2008 9:09:30 AM
MikeP, then you're talking about an even less direct relationship - and I'm even more skeptical. There's an awful lot of magic pixie dust that has to go just the right way in your theory for these rich-savings-dollars to turn into jobs for Americans.
Remember, that's the original claim of you supply-siders and your enablers: that when the rich "keep more of their money", they wisely invest it in ways that create more American jobs. Not in ways that make US dollars worth more; or any one of a dozen other things - the claim was about the jobs. Directly.
Posted by: M1EK at Feb 15, 2008 9:37:27 AM
Addressing guyinthevealcalfoffice:
No I don't think it's better for Mexican farmers to pay 3 times as much for corn. But NAFTA doesn't help keep the price down:
http://www.washingtonpost.com/wp-dyn/content/article/2007/01/26/AR2007012601896_pf.html
And asieguana:
Business for farms may go up. Income may go up. But the actual number of farmers is decreasing:
http://www.agclassroom.org/gan/timeline/farmers_land.htm
Farming is becoming a top heavy industry owned by a few rich people.
Posted by: John at Feb 15, 2008 9:53:03 AM
M1EK,
No magic pixie dust is necessary. In fact the result is inevitable and inescapable. When your dollars go overseas, they come back, and when they come back they are used to buy goods or to invest in American businesses, no different than if the money never left at all. There is no difference between investing overseas and investing in the U.S. as long as it is done with U.S. dollars.
The only time that is not true is if the overseas trader burns the dollars rather than get some value for them- an unlikely scenario. But if that's what you're hanging your hat on, then keep in mind that the result would be lower prices ad increased standard of living for everyone in America- essentially America would be getting free goods/services/equity from overseas.
Posted by: Cliff at Feb 15, 2008 10:25:05 AM
Cliff, that's boiler-plate supply-side nonsense - and to argue that there's no difference for the US worker between having a job here versus the rich investor spending on a factory in China is just ludicrously wrong. Eventually the dollar comes back to our economy, sure, but not necessarily in the form that helps that worker, or for that matter, any worker like him.
Remember, the original assertion, which you guys are furiously trying to backpedal away from, was that the rich dude is going to invest his savings in a way that creates jobs in this country.
Posted by: M1EK at Feb 15, 2008 11:02:01 AM
Eventually the dollar comes back to our economy, sure, but not necessarily in the form that helps that worker, or for that matter, any worker like him.
You may have a point if all that worker can do is work at a t-shirt factory. In that case it is true that investment in t-shirt factories in China will have a hit on his ability to find a job or his pay should he find one.
But all the workers who are not like him see a benefit through the leverage of comparative advantage.
Just so I am clear on the boundaries of your mercantilism...
1. Are you as protectionist with regard to consumption as well as investment? That is, are you as against someone buying a toy from a Chinese firm as you are against someone buying stock in an Chinese firm?
2. Is the investor in Illinois who invests his money in an Indiana firm an evil supply-sider (-sidee?) who is hurting the workers of Illinois?
Posted by: MikeP at Feb 15, 2008 2:08:21 PM
Oh stop it. Just stop it. Next you'll be banding together the townspeople with torches to fight the socialists.
My only contention is that it is disingenuous of you to make the claim that rich dudes who save their money will invest it in ways which result in jobs for Americans, because the obvious implication is NOT that they invest that money in some other country which eventually trickles something back here, but rather that Joe Industrialist is going to start a company in the USA with it.
That's all.
Posted by: M1EK at Feb 15, 2008 2:30:44 PM
M1EK, Americans have around 80% of their stock-holdings in US companies.
Posted by: scottynx at Feb 15, 2008 2:43:15 PM
Low wage earners spending money at WalMart aren't investing in China?
Posted by: JasonL at Feb 15, 2008 4:42:27 PM
The obvious implication in the "rich guy saving money is great because he will invest it" is not only that the current figure is 100% in US job-producing companies, but that it's not moving down either.
If not true, you should stop dishonestly saying that each dollar the Rich Dude Saves gets Invested In Our Jorbs. Some do, and some don't; and the jorbs might be here or they might be there. And that might be good or it might be bad; but just Stop Saying It's An Investment In Jobs Here If It Isn't, OK?
Posted by: M1EK at Feb 15, 2008 5:43:19 PM
I'm amazed at the lack of basic economic literacy among not only people who should know better (politicians, pundits) but also among people on a freakin' economics blog.
Posted by: Jacob Oost at Feb 16, 2008 1:14:22 AM
M1EK, it is undeniable that money invested overseas by Americans will be redirected here, because that is how the money conversion process works.
More to the point, we shouldn't be concerned with money or jobs here, the real point is wealth--i.e. actual things. Money invested overseas in a widget factory means cheaper widgets here at home. Thanks to outsourcing of manufacturing, low-income people can afford luxuries like mobile phones and DVD players. Somebody hung up on whether that person kept their job or not might have prevented the outsourcing from ever taking place.
Posted by: Jacob Oost at Feb 16, 2008 1:25:14 AM
Jacob, once again for the record: I am not arguing anything about the merits of globalization.
I am saying that if you claim that Rich Dudes Saving Money translates to Jobs For Americans via the Magic Of Investment, and by the way, 'you' DID make that claim, you need to explain what happens when they invest the money in a plant in China instead of here, because everybody damn well knows you were trying to make the US worker think _he'd_ be getting the job. Not that the money would work its way through the global finance system and someday end up coming back as a cheaper DVD player.
I am not at all surprised that the heroic brigade of libertarian ideologues keeps trying to shift the goalposts. Disappointed, yes. But not surprised.
Posted by: M1EK at Feb 16, 2008 3:37:43 PM
Me? That was the first comment I made. As for "libertarian ideologues" moving the goalposts, everything I've read on the subject of globalization by any economist, libertarians included, never tried to give the impression that money invested overseas translated to increased jobs at home.
If anybody is moving goalposts, it's the "libertarian ideologues" who posted comments here promising increased jobs from overseas investment. I can't answer for them, since I'm more utilitarian than libertarian.
Posted by: Jacob Oost at Feb 16, 2008 9:40:13 PM
Actually M1EK, a scan of the comment section reveals that it was you who put forth the jobs theory, not anybody else. IOW, it seriously looks like you are putting words in peoples' mouths.
Posted by: Jacob Oost at Feb 16, 2008 9:55:14 PM
Jacob, the posting itself from Tyler argues that investment translates into better stuff for non-rich Americans (and not in the "cheaper DVD player for an unemployed guy" fashion).
Then, start following the comments and the narrative is very obvious. The claim about US jobs isn't made directly by the lib-ideologues; but they show their stripes by viciously attacking the intelligence of anybody who argues the opposite.
Although you get pretty close in comments like this:
"When the rich invest their money, it doesn't just sit there. It gets spent, just by someone else! In fact, where does he think companies get the money to pay their workers wages, which are then spent on other goods and services? Duh: investors!"
Posted by: M1EK at Feb 17, 2008 9:33:52 AM
I really hate these comment section debates, but I'll say this and say no more:
1) I did not read the same implied arguments you saw, and if I had noticed them I likely would have corrected them in saying that overseas investment directly translates to more domestic hiring.
2) The quote you make there implies domestic investment, IMO, not overseas.
3) I like to be very empiricist, so I'd encourage you and everybody for that matter to not assume that because a person says A then he also must mean B and C as well. I do not like when people assume I hold some position I do not, and I'm sure you don't like it either, so I prefer to take on what people say directly, lest I wind up attacking something they never meant.
Posted by: Jacob Oost at Feb 17, 2008 8:39:12 PM
