Arnold Kling  

Klingian Paradox of Thrift Watch

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Michael Mandel writes,


Let me repeat that: Government net investment as a share of net domestic product is at a 40-year low. I had to check this last one a couple of times to make sure it was really true. This is a true failure of national economic policy. Government is punking out, just at the time when a public investment surge is needed to make up for the private investment drought. As a country, we should be investing more, not less.

Read the whole thing. Pointer from Tyler Cowen. David Henderson and others expressed skepticism about my paradox of thrift. I count Mandel's chart and analysis as evidence in my favor.


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COMMENTS (9 to date)
Becky Hargrove writes:

The further paradox is how the consumer/household is still expected to bridge the gap, when much of what gets consumed at the individual level (education, assets) is not seen as direct links to other social infrastructure (utilization of skills at a one to one or community level). What the consumer buys has been seen more as passive support for the providers of the marketplace, rather than an actual working part of the marketplace itself. The lack of investment by government or business in the present would not be so detrimental were it not for that reality.

David R. Henderson writes:

@Arnold,
How does a graph showing that investment is low make the case that an increase in saving would lead to zero increase in investment?

Chris Koresko writes:

I don't understand Michael Mandel's concern. Based on eyeballing his chart, government net investment over the whole 4-decade period is about 1.3% of GDP, with a deviation of perhaps 0.3%. The latest figure is indeed the lowest, but only marginally so.

In fact, the standard deviation of government net investment is tiny compared to the roughly 3% value for net private investment: it's the low net private investment, which is fully 3 or 4 percent below typical, that's the problem.

This conclusion is strongly supported by a set of charts John Taylor published a few months back. They showed a beautiful correlation between employment and private investment... and essentially no correlation with government spending.

If Mandel wants to criticize something, he might focus on the shrinking fraction of government spending that falls into the "investment" category.

Steve Roth writes:

For a big-picture view, I put together charts of gross, net, and consumption since 1930, broken out by different segments of the economy. Here:

http://www.asymptosis.com/capital-in-the-american-economy-since-1930-kuznets-revisited.html

David N writes:

If everyone saved like crazy it would just push yields down. That would be good for investment. People could go into debt more and take on bigger projects because it would cost less to borrow. I don't see a paradox, or a problem with that.

I do see an irony though, not a novel one, in that the more we'd save the harder it would be to get a desirable return.

Tom Lindmark writes:

Chris Koresko's comment is to the point. Mandel is making a big deal out of not much at all.

If you look at the high points for government investment they correspond to periods of conflict. The Vietnam War was at its most intense leading up to the starting point of the graph in 1969. The other major increase in government investment occurs during the mid 1980s when Reagan was spending the USSR into the ground.

John Fembup writes:

Government investment? In what is our government investing?

Don't most investors act on some plausible expectation of a positive outcome or return?

Has our present government based its "investments" on such expectations?

Has it instead spent money it doesn't have but plans to print on implausible - even wildly implausible - expectations (energy companies in Finland and Brazil; the Solyndra mess; temporary reductions in SS contributions that become permanent; GM; others)?

Could it be that to create an impoverished population that believes it is wholly dependent on government is the correct modern definition of a rational governmental "investment" objective?

Just askin.

Arnold Kling writes:

David,
We had the increase in private saving rates. We have low investment. That is a paradox-of-thrift result.

The Klingian mechanism is that government spends the money that the public saves, keeping investment low. That mechanism gets some support from the chart.

Chris Koresko writes:

Arnold Kling: The Klingian mechanism is that government spends the money that the public saves, keeping investment low.

I don't have the data in front of me, but this sounds like what's been going on in Japan for some time now. Their government debt is something like twice their GDP, and most of that is owed to private Japanese savers, if memory serves.

Is this what people are talking about when they speak of government 'crowding out' private investment?

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