To overgeneralize slightly: We have gone from being an expansive, risk-taking society to a skittish, risk-averse one. Before the 2008-09 financial crisis, the bias was toward more spending. The inclination was to surrender to immediate gratification. Want a new car? Sure, why not? More meals out? Great idea! Businesses behaved similarly. Banks made the next loan; companies hired the next worker and approved the next investment project. An ever-expanding economy justified optimism, and optimism supported an ever-expanding economy. Hello, bubble.If, like me, you grew up in the 1970s and 1980s reading about how the US was falling behind Japan because of our "anemic" savings rate, this sounds very strange. The old economic model was that the main determinant of economic growth was investment, so what would increase growth was more saving, leading to more investment.
The psychology has now reversed. The bias is against extra spending. Eat out? Try leftovers. Remodel the basement? Oh, leave it alone. In the boom years, the personal saving rate (savings as a share of after-tax income) fell from 10.9 percent in 1982 to 1.5 percent in 2005. Now it’s edging up; from 2010 to 2012, it averaged 4.4 percent. It could go higher, imposing a further drag on the economy.
If this was ever true it is not true any more. Now even Republican-leaning economists like Samuelson admit that we have plenty of money to invest, so this is not the problem. On the contrary, we have in the world today vast pools of capital desperately searching for any sort of investment opportunity. I was just talking to an acquaintance in real estate who complained that several commercial properties around Boston had recently been bought by Asian investors at prices so high those investors are guaranteed to lose money in the short term. There is so much money around, he suggested, that to some people a modest but predictable rate of loss seems like a better choice than remaining exposed to the swings of global capital markets.
No, our problem is low demand.
I have never claimed to know much about economics, but it seems to me this calls for a liberal solution. Attempts to increase demand by cutting taxes have had little effect; after all, the rich already have more money than they can spend or invest profitably. The only way forward I can see would be to tap some of that idle capital through high taxes on the rich, or taxes on financial transfers or some such, and let the government invest it in public infrastructure. Building a high-speed rail network would create a lot of jobs and leave us all better off at the end; all of our major subway systems could be expanded and upgraded; our water and sewer systems need billions in repairs; potholed roads could be repaired; aging schools could be renovated or replaced; and so on. This is not the sort of program I would have endorsed 15 years ago, but right now I don't see any alternative. The way things are going, the Labor Department doesn't expect the unemployment to fall below 7.5% until 2015, and that is a horrible thing to impose on working Americans.
On a deeper level, I have to ask myself what it means that our economy depends on constantly increasing our consumption. We already live in a world where bottled water shipped from Fiji seems perfectly normal, and $4 cups of gourmet coffee are the daily indulgence of students and mailroom clerks. We have more clothes than we can wear, more stuff than we can fit in our enormous houses, luxurious cars with enough available horsepower to power our electrical grid 50 times over. Is this the best we can do with the vast resources created by our awesome technological and managerial prowess? I would prefer to invest more, via taxation, in things like providing addiction treatment for everyone who wants it, prenatal care for all pregnant women, more parks, more flower gardens, and other public goods. But on an economic level, this is more or less the approach they take in Europe, and they have a terrible problem with unemployment, too. So it remains a mystery how to make a modern economy work for everyone.