Physical savings
April 8th, 2009 | Published in Current Events, Economics idea | 2 Comments
Recessions are caused by people saving more than they earn. When this happens, demand falls below supply and businesses are forced to cut back production. For the economy to pick up again, money needs to get spent. Someone has to buy what has been produced.
This is the idea behind government stimulus spending. Governments can solve the problem of low demand by buying more goods and services themselves. While this solves the immediate problem of low demand, it creates a longer term problem. The people who have been saving will one day want to spend the money they have saved.
Since the government borrowed the money, it is government that will have to pay it back. The only honest way for them to pay it back is from taxes. Triggering inflation or defaulting on loans would also solve the problem, but investors wouldn’t be happy. For the savers to get the value of the money they invested back, either taxes have to go up or government spending needs to fall. People won’t be happy with any of these ways of paying back the debt.
I think a better approach is to solve the problem of excess saving in a way that makes sense physically. If people want to save more than they earn, some of what people produce needs to be physically saved. A way needs to be found to set aside goods that can be stored for long periods of time. One way to do this would be to stockpile something like steel when demand in the economy is low.
When savings is higher than borrowing, mining and smelting would expand. People laid off because of reduced consumer spending would move to these sectors. When the savings is drawn down, mining and smelting operations are mothballed and the stockpile is drawn down. This frees up workers to produce the consumer goods people want.
This is something that governments could do right now. They could start buying up steel to pick up the slack in demand in the economy. Instead of building infrastructure that might not be needed, the government could be preparing for the eventual increase in demand that will inevitably come.
April 14th, 2009 at 3:19 pm (#)
I’m having trouble understanding fully the cause of recessions. Is it as simple as “people saving more than they earn”? What triggers this to happen? If I look at individuals, people who are laid off suddenly lose their income – they don’t keep their income but just decide to spend less.
Of course, being laid off can be a result of a recession rather than a cause. What is the underlying cause that results in people saving more?
Eric
April 15th, 2009 at 2:22 pm (#)
Eric.
Good question. I don’t think there is a simple answer for how people decide how much to save. I know that I don’t really know how much money I should be setting aside for retirement. I don’t know how much my savings will be worth when I retire. I don’t know for sure what my needs will be when I retire. I don’t even know if I will live to retirement age.
Even the near term is difficult to manage. I don’t know for sure how much money I am going to make over the next few years.
Combining all this, savings decisions are really just guesses. Lots of things can influence how much I save. The problem is that some things affect a lot of people at the same time. A shock to the economy gets everyone worrying at the same time and causes savings to go up. For all I know, a successful ad by a mutual fund company might ramp up savings too.
The answer isn’t to try to affect how much people save. The answer is to find ways for the economy to respond effectively to the decisions people make.