I ran a Google search this morning by typing in the words “I can forgive, but I will never forget.” Google returned to me, in 0.38 seconds, 4,380,000 results. Apparently, this is a very common response and reflection.
Even when an individual has changed his ways and made amends for his foibles, we often remember the former ways, never quite forgiving as we might.
As we shall soon see, this concept appears to be alive and well in our economic and political lives. We seem to retain in remembrance the mistakes and misdeeds of the past, most notably when those mistakes are no longer relevant. Specifically, the inflation of the 1970s has somehow been etched into our national psyche even though our real economic challenges today are quite the opposite.
During September and October we have been focusing a bit of attention on the growing evidence that our economy has undergone an important change. Desired savings in the country has been rising for several decades. At the same time, desired investment has been dropping.
Note that I used the economic term “desired.” This is the savings and investment which the economic players, or “agents,” attempt to accomplish. When we add up every household’s savings plan, we get “planned” or “desired” savings. Similarly, when we add every business’s investment plan, we get “planned” or “desired” investment.
As it turns out, actual (as opposed to “planned”) savings and investment must be equal. This is according to our national income accounts. It is an accounting identity. So what happens when planned savings exceeds planned investment as seems to be the case at the moment? How does that work?
Since actual savings and investment in an economy must be equal, someone is going to be disappointed. Whenever planned savings exceeds planned investment, either households will fail to actually save as much as they desire, or businesses will actually invest more than they desire.
When households attempt to save more than businesses want to spend, the economy has a shortfall in spending. Since one person’s spending is another person’s income, a shortfall in total spending leads to a reduction in total income. When income is reduced, desired savings naturally goes down. Unfortunately, so does output and employment.
To sum up, when increased savings is not met with an increase in investment spending, unemployment rises to a point to bring desired savings into line with desired investment. In other words, the “invisible hand” sends out a challenging message to our economy: “So you want to save more? Go ahead and try. I am not going to let you. I will see that enough people are laid off until you bring your desired savings back down to where investors want it.”
The invisible hand can be a real witch!
Is this situation a theory or is it how things actually are? It is how things actually are. In the eurozone this is a major problem. In the U.S. it is also a significant challenge which is likely to remain with us for a long time.
Unfortunately we focus too little attention on this problem. As I read through the press, I am continually perplexed by the persistent fixation with inflation. Inflation was a problem in this country in the 1970s. It was a problem in Germany following WWI.
Yet, inflation has not raised its ugly snout in decades. So why do we still focus on this issue? Could it be that, “I can forgive, but I will never forget?”
Inflation is not the economic challenge of the 21st century. Insufficient aggregate demand and its accompanying unemployment and under-employment is the real issue to confront. What evidences point to this? Long term trends in savings and investment, which we discussed last week, highlight the point.
Additionally, we can look to Japan, which has already gone down the road we are traveling. Germany is also ahead of us on that same path. Deflation and unemployment has been their dilemma.
This quagmire is actually the opposite of inflation. Consequently, those who focus on inflation have their gaze pointed at the policies which are certain to worsen the actual economic ailment from which we are suffering.
How do we approach this disease? What tools do we have in our arsenal to combat insufficient aggregate spending? How do we approach the problem of chronic unemployment which flows from insufficient investment spending?
Anything which impedes employment is something to be avoided. For example, in the US, corporations are generally required to provide health insurance to full-time employees. This adds to the cost of employment. In most advanced nations, health insurance is provided universally through a public initiative. This removes the burden from corporations, thereby reducing the expense of employment.
There are other initiatives that we can examine in future columns.
We might also profitably ask has anyone dealt with this problem in the past? Yes, Japan. What have they done and what things have worked?
One policy the Japanese have pursued is to increase investment through government spending. This can be done in any advanced nation which borrows in its own issued currency. In the U.S. we have an aging infrastructure badly in need of repair and modernization. Could we do the same as Japan? Of course.
Corporations channel savings into investment. The government can do the same when the private sector will not step up to the plate, but will that not increase our government deficit? Will that not burden our children with a load of debt? Will we not have ever increasing interest payments to make? Is not debt a form of slavery? Sure the Japanese have run up their debt seemingly without a problem, but what would happen here?
We will revisit this topic next week.
(Marcus Hutchins, MA, M. Phil, economics, Columbia University, NYC, is a former economist, treasury bond arbitrage trader and hedge fund manager. He retired to Southport in 1997 where he resides with his wife Andrea and his youngest daughter Abbey. He welcomes feedback at coastaleconomist@me.com.)
