http://diaryofarepublicanhater.blogspot.com/2013/02/its-on-holy-war-over-says-law.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29
The whole basis of the supplyside economics of Sumner is that we need to first save to later invest. This is the basics of Say's Law. Sumner's NGDP is supposed to leave us in a world that puts A/S in the driver's seat-ie, a Say's Law world:
"We are in an AS/AD world where the Fed is essentially keeping P level (on a plus 2% trend.) In that world AS drives output. There can be demand shortfalls (indeed there is right now), but this has nothing to do with the Keynesian critique of Say’s Law. Any attempt to supply more really does create more demand—from this point forward. Saving doesn’t depress demand. The problem is that inflation is the wrong target—they should stabilize NGDP growth."
Ok, so savings drives investment. Who will carry the other side? Actually, Suvy commenting over at Sumner puts it pretty succinctly
"any version of Keynes saying that savings is turned into investment is flat out wrong. In the Keynesian theory, investment is turned into savings. Keynes expounds on this in both The General Theory and in his papers after The General Theory."
“The investment market can become congested because there is a shortage of cash. It can never become congested when there is a shortage of savings.”–J.M. Keynes
“Surely nothing is more certain than that the credit or “finance” required by ex-ante investment is not mainly supplied by ex-ante saving.”–J.M. Keynes
"By the way, Keynes also says that investment is what gets turned into savings in chapter 4 and chapter 7 of The General Theory as well."
http://www.themoneyillusion.com/?p=19358#comment-226956
JHK over at Monetary Realism has an incisive critique of Say's Law and argues clearly that investment drives savings not the other way around.
"The saving that will correspond to investment that has yet to be made can only materialize in future accounting statements. All saving that has been made to date is already used.
And this is the case regardless of whatever pattern of corporate profits and cash hoarding that is already in place."
"And that is really goes to what is wrong with Say’s Law at the most fundamental level.
Say’s Law denies that a propensity to save from income can cause underemployment of resources. In other words, it claims that a propensity to save will be matched by employment of resources. This is what Keynes attacked. Aggregate demand can fail as a process."
"But saving from income doesn’t finance investment in ANY meaningful ex ante aggregate demand sense – let alone the way in which Say’s Law or Tyler Cowen seem to think it does. Macroeconomic saving cannot be deployed, ex ante, into new investment. That relationship has already happened. And so Say’s Law cannot hold simply due to the error in macroeconomic causality of saving and investment and the impossibility of attempting to force saving to “do something” in terms of an ex ante effect on the employment of resources."
"Banking is part of the mix. This muddies the waters even further, and in complicated ways."
One way that Sumner often muddies the waters is with the identity S=I. He mentioned that during this current dispute .
"Yesterday I wrote:
But if and when Krugman does draw some policy implications from the “sinkhole” of corporate saving, he’s way too savvy to ignore the saving/investment identity. He’ll talk about income distribution, propensities to save, and dysfunctional monetary policy. Or at least imply those assumptions."Looks like we can assume Mr. Krugman doesn’t read my blog, as his newest post is a step backward, invoking the tired old myth that conservatives just don’t get why Say’s Law is a fallacy."
This is another recurring issue at Money Illusion. I still remember that time in January of 2012 when he went off half-cocked for 3 weeks because he didn't like Krugman's criticism of Lucas. He claimed that 'savings is buying capital goods.'
As JHK argues above, there's no justification in assuming that saving will lead to future investment-indeed JKH argues that saving always refers to the past.
http://www.bing.com/search?q=the+money+illusion+saving+is+spending+on+capital+goods&form=ASUTDF&pc=NP06&src=IE-SearchBox
So that's always a useful strategy for him: if you don't agree with him then you deny S=I and well, what more can there be to discuss then if you deny such basic, obvious, reality?
Mike, loved this! One thing though, you wrote:
ReplyDelete"As JHK argues above, there's no justification in assuming that spending will lead to future investment-indeed JKH argues that saving always refers to the past. "
Did you mean "that spending will" or "that saving will?"
Glad you liked it. Yes I meant "saving will" of course. A typo. TK for pointing it out.
ReplyDelete... no prob... but... uh, aren't you going to go fix it now?
DeleteYes and no-LOL. I wasn't going to then as it turned out-but I have now. Sometimes I procastinate!
DeleteI liked JKH's article, but your article here is very good. I confess I have a hard time following JKH's explanations in the comments section. I wish there was a good simple concrete example in there I could follow. Do you think you could do one... perhaps with a "macro" economy that consists of two people on an island or something?
ReplyDelete[BTW, I'm watching Rubio propose a balanced budget amendment right now. Ha!)
Yes. Just to warn you guys I loved the President's speech. That mimimum wage proposal was totally unexpected and will drive Sumner nuts! Which is a bounus of course
ReplyDeleteI follow much of JKH's point I think but he seems to be suggesting that KRugman's question about Apple's balance sheet-their retained earnings-can't even be framed in the normal income statement approach.
ReplyDelete"That money cannot fund a new loan in the macro sense. Loans create deposits at the macro level – not vice versa. Existing loans already account for deposits originally created from them. In addition, the liability composition of banking is constantly swirling in mix such that deposits may be converted into other liability forms and vice versa. But all of that occurs within the accounting constraint of double entry bookkeeping, such that deposits that exist at a point in time cannot logically be linked to subsequent incremental lending at the macro level"
"More generally, banking stocks and flows are quite separate and distinct from the macroeconomic measure of saving and investment. By even referencing corporate cash hoards in the same context as presumed corporate saving, the issue of Say’s Law has become commingled with the issue of accounting coherence"
So he seems to be saying this is an issue about banking and deposits.
Mike, Here's the late Nobel Laureate Bill Vickery's take on savings, from his 15 fatal fallicies of financial fundamentalism: Urging or providing incentives for individuals to try to save more is said to stimulate investment and economic growth. This seems to derive from an assumption of an unchanged aggregate output so that what is not used for consumption will necessarily and automatically be devoted to capital formation.
ReplyDeleteAgain, actually the exact reverse is true. In a money economy, for most individuals a decision to try to save more means a decision to spend less; less spending by a saver means less income and less saving for the vendors and producers, and aggregate saving is not increased, but diminished as vendors in turn reduce their purchases, national income is reduced and with it national saving. A given individual may indeed succeed in increasing his own saving, but only at the expense of reducing the income and saving of others by even more.
Where the saving consists of reduced spending on nonstorable services, such as a haircut, the effect on the vendor's income and saving is immediate and obvious. Where a storable commodity is involved, there may be an immediate temporary investment in inventory, but this will soon disappear as the vendor cuts back on orders from his suppliers to return the inventory to a normal level, eventually leading to a cutback of production, employment, and income.
Saving does not create "loanable funds" out of thin air. There is no presumption that the additional bank balance of the saver will increase the ability of his bank to extend credit by more than the credit supplying ability of the vendor's bank will be reduced. If anything, the vendor is more likely to be active in equities markets or to use credit enhanced by the sale to invest in his business, than a saver responding to inducements such as IRA's, exemption or deferral of taxes on pension fund accruals, and the like, so that the net effect of the saving inducement is to reduce the overall extension of bank loans. Attempted saving, with corresponding reduction in spending, does nothing to enhance the willingness of banks and other lenders to finance adequately promising investment projects. With unemployed resources available, saving is neither a prerequisite nor a stimulus to, but a consequence of capital formation, as the income generated by capital formation provides a source of additional savings. There all here: http://www.columbia.edu/dlc/wp/econ/vickrey.html
Thanks for that explanation Nanute! That really gets to the heart of what's wrong with that Supply Side Illusion that we always don't have enough savings and we should incentivize savings at the expense of spending.
ReplyDeleteTo me it seems we should prioritize spending.