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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
