Friday, February 22, 2008

Savings Spree!

I know spending sprees are more fun than savings sprees, but we need to think about some simple economic principles. Any model of economic growth suggests that long term growth is determined by investment. Simply put to make more stuff in the future we need more education and machines, which we get through investment. We cannot invest money if we use it instead for consumption. I have been thinking about this a lot in terms of the proposed fiscal stimulus, which would send everyone a check. My father, also an economist, provides his own take on the stimulus checks [link]. He concludes his article by saying

“The economic slowdown is a more immediate, transitory and solvable problem with the proper medicine having been administered. The longer-run problems await a real response.”
It is unclear if the stimulus is the proper medicine or if we’ll be over the short term dip before the check gets in our pockets. One long run problem is that Americans do not invest enough. The US’s investment rate is 15.6% (CIA FACTBOOK) ranking it 135 out of 148 countries with data. 134th Guatemala and 136th is the Philippines.

Perhaps a graph would also demonstrate the problem. The US is the red dot on the graph of investment as percentage of GDP and GDP per capita (PPP adjusted). The US is below most of Europe with 10 being about where Easter Europe and low GDP Western Europe GDP PPP (ln) fall.

So as the New York Times suggests, perhaps it is time to go on savings spree.

*** I wish I could make the graph bigger, but if you click on it you can look at it closer. I left out a few countries, but it is 110 minus a few where the formatting messed up my conversion.

1 comment:

rjgitter said...

Seth remarks that given the Fed's cuts and the tax rebate "It is unclear if the stimulus is the proper medicine or if we’ll be over the short term dip before the check gets in our pockets. "

I am still optimistic in the long run. The problems of savings he cites and others I do in my post are one's we are award of and hence can deal with. (I just hope we do!) But in the short run, I think the odds are we are in the middle of a rough spot. Look at the minutes from the most recent Fed meeting.

“In their discussion of the economic situation and outlook, and in the projections that they had submitted for this meeting, participants noted that information received since the December meeting had been decidedly downbeat on balance. In particular, the drop in housing activity had intensified, factory output had weakened, news on business investment had been soft, and conditions in labor markets appeared to have deteriorated. In addition, consumer confidence had remained low and business confidence appeared to have worsened. Although the functioning of money markets had improved notably, strains remained evident in a number of other financial markets, and credit conditions had become generally more restrictive.”

Add to that yesterday's announcement that the Leading Indicators fell again*** in January
and I think one could argue it is quite likely that without the boost from the Fed and the tax rebates we would not be seeing economic recovery in late spring.

*** feel free to insert notion that Leading Indicators have predicted nine of the last five recessions.