Yves here. Note that Amar Bhide comes to conclusions on Piketty similar to Cameron Murray’s, aka Rumplestatksin, from a very different starting point. From Bhide’s new article in Quartz:
Partisans argue that financial systems that channel savings into risky investments are an essential feature of an advanced economy: compare, they say, the US economy with China’s or Russia’s. The US financial system is certainly more sophisticated, but it has long been so. And, the expansion of finance in recent decades doesn’t seem to have turbo-charged the economy; as financiers have channeled more funds into risky investments, growth in overall incomes and productivity has if anything flagged, while the compensation of financiers, never paltry, has unmistakably jumped…
The US Federal Reserve’s failure to control inflation in the 1970s eroded investors’ faith in bonds and bank deposits while pension rules and regulators encouraged a shift to stocks and other higher risk assets. Until 1968, for example, public funds in California and 15 other states did not own any stocks. The state laws prohibiting stock purchases were then repealed. Rules intended to ensure that pension plans were properly funded encouraged state and other pensions to buy stocks that are thought to have greater upside than bonds. Now, 65% of public funds are invested in stocks, real estate and other alternative investments.
Securities laws enacted during the New Deal and their vigorous enforcement have made buying and trading stocks respectable. Previously and for much of America’s history, “the public reaction to the stock market was one of general distrust.” Shady activities were rampant through the nineteenth century, and in the early twentieth century, the stock market was still “a shadow world in which only the initiated could find their way.”
The Fed, established to prevent collapses in old-fashioned bank loans, has also become a stalwart supporter of stocks. Chairman Alan Greenspan created the impression that the Fed would do everything it could prevent stock prices from falling.
Government mortgage guarantees and purchases of mortgage-backed securities have turned millions of the not particularly well off into leveraged speculators in real estate. Earlier, bank regulators frowned upon mortgage lending, so until 1930 banks extended mortgages to borrowers who could pay off their loans in three years or less, while demanding 50% down payments.
These interventions may have been well-intentioned efforts to bring everyone into the miraculous transformation of good economic growth into great wealth. But far from spreading the riches around, the government has bestowed great fortunes on a few who would otherwise merely have been prosperous. And promoting Wall Street’s self-serving fantasies has jeopardized the legitimacy of a capitalist system that provides great reward for great contribution.
By Rumplestatskin, a professional economist with a background in property development, environmental economics research and economic regulation. Follow him on Twitter @rumplestatskin. Cross posted from MacroBusiness
As I explained last week, saving by an individual is usually achieved by buying monopoly assets from others, forgoing consumption in order to capture a future flow of income for oneself.
This usual way to save is merely a transfer of assets whose value equals the difference between income and spending. Someone gets richer, others poorer. But importantly, the rate of saving of an individual, when understood in this manner, bears no relation to investment in the quantity of new capital goods in the economy generally and can’t be related to the rate of growth of the economy.
Transfers don’t matter for investment, and most savings are transfers.
Yet it is very common to hear that rich individuals, because less of their spending goes towards consumption items, are able to save more, leading to greater levels of investment in new capital goods and higher future productive capacity.
While many economists profess a degree of caution in such analysis when challenged, the very notion that saving at an individual level equates to a proportional level of investment in new capital at a national (or global) level is embedded in the economic way of thinking.
Here’s Tyler Cowen making the point implicitly:
Stocks of wealth stimulated invention by liberating creators from the immediate demands of the marketplace and allowing them to explore their fancies, enriching generations to come.
And here’s Karen Dynan et al.
…active saving corresponds to the supply of loanable funds for new investment and therefore may be helpful in gauging the effect of a redistribution of income on economic growth.
But since saving at an individual level is almost solely about buying monopoly assets from others, this claim simply cannot be made. Saving at an individual level is nothing more than a transfer of ownership of existing wealth.
When I buy some Apple shares in order to save, I merely buy from the current owner, changing absolutely nothing in terms of Apple’s intentions to invest in new production machinery and equipment.
If saving is as I described, the fact that the wealthy have a lower propensity to consume, and therefore a higher marginal propensity to save, merely implies increasing wealth inequality, as assets accumulate in the hands of the already wealthy; a trickle-up effect if you will.
This is particularly relevant to current debates about how to address inequality. Would a wealth tax on the rich decrease overall investment? Not at all. The tax would be a transfer of ownership of resources, just like the saving of the rich is a transfer of assets and unrelated to investment in new capital equipment.
It is possible under very specific circumstances for an individual’s savings to exactly match investment. For example, if I buy a specific financial instrument that pools my funds with others to finance construction (but not land purchase) of a new building. But that is a rare case that proves the general point that there is no proportional matching of saving and investment at an individual level.
While I have said nothing that contradicts economic theory, I do find it frightening that experts in the field have such contrasting views on the matter.