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 Mish Quotes Pettis who Quotes Eccles on Under Consumption

3/18/2014

3 Comments

 
Mish misses the point(again).
Pettis:
 Former Fed Chairman (1932-48) Marriner Eccles, who may well have been the most subtle economist of the 20th Century, from his memoir, Beckoning Frontiers (1966):

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth – not of existing wealth, but of wealth as it is currently produced – to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations.

But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.


Pettis again:
I will again quote Mariner Eccles, from his 1933 testimony to Congress, in which he was himself quoting with approval an unidentified economist, probably William Trufant Foster. In his testimony he said:

"It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they cannot save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.

It is for the interests of the well-to-do, to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit.
"

3 Comments
Brent Buckner
3/23/2014 02:29:00 am

Pettis has his full post publicly available now:
http://blog.mpettis.com/2014/03/economic-consequences-of-income-inequality/

It's provocative, but I think it has a few issues.

I think it could have been more clear in separating the notions of monetary savings and capital investment - the Eccles quote is a bit of an encouragement to conflate the two.

Further, I would have liked to see Pettis reconcile his two statements:
o "I am not saying that every productive investment in the US has already been made, but just that if there are productive investments that remain unfunded, it isn’t because of insufficient savings." and
o "Second, most economic thinking is implicitly about the US or the UK (most economic theory comes from economists trained in one or the other country). Because these countries have had a problem in the past several decades with excessive consumption and insufficient savings, we assume that these are universal problems. We want global savings to rise because we want US savings to rise, because what is good for the US must be good for the world, right?"

Reply
Karl
3/23/2014 07:59:17 am

Good points Brent.
There are a few things that come to mind prompted by your comments. One is that increasingly a large amount of profits and savings are being stranded in offshore haven Former McKinsey Chief Economist estimates this to be 30Trillion -2/3s from developing countries.
Last week I woke up to BNN and a yet another pharmaceutical company was doing a reverse take over with an Irish company so as to get access to 15% corporate tax rates.
These funds if they get repatriated are often subject to tax.

So in my mind we can have an under consumption crisis which I would suggest there are lots of indicators in the US to support CAGR of foods stamp program of 12%, disability rolls, falling LFPs, median income down to 1992 levels etc.
OTOTH we can have an artificial saving shortage because of tax arbitrage by the corporations and the elite.
I don't think the hurdle rates for business investment as fallen by near the amount that risk free rate has dropped.
When as the video suggests, Apple, Amazon, Starbucks, Pfizer pay next to no taxes on the foreign profits they are saving 35% this makes investing in the US below what it would be if taxes would be equalized and set uniformly across the OECD.
IMO, tax havens make it so you can have simultaneously have underconsumption, and inadequate savings.
Finally, I haven't read Pettis full post yet but in previous posts he has suggested the US has under invested in infrastructure for some time now. This is not controversial.
1/4 of the US bridges have been given a D or worse.
The US is in desperate need of a high voltage spine connecting east west and north south.
Economists like Sachs have argued that an infrastructure investment program is part of the solution. It doesn't solve the problem forever because the underlying issue is structural unemployment but you would get a GDP bounce that would be positive and self reinforcing.
As recent research suggests, there seems to be a negative feedback loop between weak demand (underconsumption) and investment, more government spending would reduce this second order effect. (IMO people are underestimating the size of the multiplier in these projects).
I think the key distinction between Eccles (great depression) time and today is the ability to use tax havens.
The US needs a "NEW Deal"+tax reform.

Reply
Brent Buckner
3/24/2014 07:13:51 am

You wrote: "One is that increasingly a large amount of profits and savings are being stranded in offshore haven Former McKinsey Chief Economist estimates this to be 30Trillion -2/3s from developing countries." and "OTOTH we can have an artificial saving shortage because of tax arbitrage by the corporations and the elite."

As I understand it, the profits and savings that are stranded by tax avoidance are included in the U.S. national accounts (tax evasion is another matter) - they are part of the current account, feed into GNP (not GDP) and thence into National Saving
e.g. page 59 http://www.gao.gov/assets/210/201778.pdf

Even though those earnings are counted, U.S. National Savings still looks low enough to me to count as a significant imbalance:
http://blogs.reuters.com/macroscope/2013/07/22/fed-on-guard-over-low-u-s-savings-rate/

Here's a longer term chart (via Pete Peterson's folks, FWIW):
http://pgpf.org/Chart-Archive/0078_Savings-Rate





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