The recent slowdown in gross domestic product growth is only a symptom of recession, not the cause. While there are many things to blame for the current crisis – most notably the subprime mortgage mess – one factor that has received little attention is America’s low savings rate.
Dalton then advocates measures to increase savings – which means reduce consumption and aggregate demand. Maybe this would be a good approach for long-term growth when investment demand is booming and the Federal Reserve is contemplating higher interest rates to cool aggregate demand in a full employment economy. But when investment demand is falling, reducing consumption demand only makes the insufficiency of aggregate demand worse. As Peter notes:
Well this is dandy: in a time of recession we should create new incentives for individuals to salt away more money. Less consumer demand, that’s the ticket. And behind this proposal is the error of thinking that savings creates investment. If the economy is in a nosedive, and businesses are going bust everywhere, who will want to invest? As I’ve written in this august blog before, our savings shortfall is the consequence of the massive and ongoing trade deficit: we have to borrow to make up the difference between what we earn and what we spend. The problem with the stimulus package, at least one of them, is that it does nothing for expenditure switching.
Hmm – policies to increase net exports. I like it! And maybe Dalton can increase his own aggregate demand by dipping into the savings account to purchase a copy of the General Theory!