Arnold Kling  

The Macro Tangle

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Tyler Cowen writes,


The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings.

I think that there are a lot of macroeconomists who instinctively would prefer more U.S. savings, higher exports, and lower oil consumption. However, they worry about getting from here to there. We now have lower asset prices to induce people to save more, a weaker dollar (notwithstanding the trend of recent weeks) to encourage exports, and higher oil prices (ditto) to discourage oil consumption. So far, the process of getting from here to there has increased the unemployment rate, but by much less than one might have expected. So far, the disruptions in financial markets have been proportionally higher than the disruptions to employment and production.


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CATEGORIES: Macroeconomics



COMMENTS (6 to date)
Gary Rogers writes:

Raise interest rates and strengthen the dollar and we can get there. It will just take time.

Dr. T writes:

Just a short while ago investment 'experts' recommended that people get 100% mortages. They expected home prices to keep rising, and by putting no money down homeowners could buy more stocks (that were supposed to keep rising, too). People went beyond that advice and bought the most expensive houses they could afford with no money down. Hence the housing bubbles (that popped) and the foreclosures (which were the major cause of our financial downturn).

Americans have short memory spans, even for big events. In three years the same spending and consumption patterns will resume. Our American culture does not include the concepts of living frugally and saving maximally.

Matt writes:

"Raise interest rates and strengthen the dollar and we can get there. It will just take time."

How would a stronger dollar encourage exports?

Gary Rogers writes:

I knew I made that last comment too short. I was half joking when I made it.

You are correct, a stronger dollar will increase savings but will not help exports. The way to help our exports is to quit borrowing money from our customers. Whatever we borrow from foreign investors is not available to buy our exports. Businesses find it useful to be in a position to loan customers money to help purchase what they are selling. Our policy is the opposite, we borrow money from our customers then try to sell them our products.

As far as a strong or weak dollar, it is less important for exports than most people think. The thing that helps exports is the transition from a strong to a weak dollar, but once we have reached a weaker level the benefit stops. The down side is that in weakening the dollar we are taking away value from everyone who has saved. Allowing the dollar to weaken in an attempt to help exports is the road to poverty.

floccina writes:

It is not nessesary that people become more frugal. If the being frugal profits more then the frugal end up with more assets which results in more saving.

floccina writes:

It is not nessesary for people to become more frugal for the saving rate to increase. If being frugal profits more, the naturally frugal will end up with more assets and more income which will result in more saving.

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