Saving Private Savings, or, The God That FailedNews at Home
During an economic crisis, the worst fear of market purists—those apparently anachronistic types who actually believe that the market is a neutral externality, something like God in its panoptical purview—is “moral hazard,” which follows from the validation of excessive, corrupt, and fraudulent behavior by misguided government policy.
The market should be allowed to do its cleansing work, these purists say; public policy should not prop up those firms (or individuals) that don’t deserve to survive the storm. If the market is so allowed to purge the economic organism, the body politic emerges more balanced, more fit to forestall untoward activity and accommodate innovation.
The obverse of “moral hazard” lies here, in the improved health of the economic organism that follows from the purge of contaminating accretions—from the excision of what we might call the irrational protuberances the market permits but, like God with respect to evil, does not itself create. Firms and individuals are taught valuable, lasting moral lessons by the penalties the market imposes on excessive, corrupt, and fraudulent behaviors. Again, the market functions as the profane equivalent of God—an anonymous, ubiquitous force that punishes transgression and rewards rectitude.
But the anonymity of this God is crucial to its standing as moral arbiter. For Milton Friedman and Friedrich von Hayek, for example, the market can sustain freedom only so long as it remains impenetrable and inscrutable, that is, beyond the grasp of reason, purpose, and policy. A free society is by definition a market society. To tamper with the market in the name of justice or stability or full employment—or, for that matter, windfall profits—is then to destroy the foundation of freedom, and to pave the road to serfdom.
“Too big to fail” is a nonsensical axiom from this standpoint. Either the market is allowed to do its work of moral uplift, or freedom as such is at risk. Either government—the site of public purpose and policy—gets out of the way of market forces, or socialism encroaches upon every choice of every individual. Now you might say that these conclusions are ridiculous in light of the Progressive Era, the New Deal, the Great Society, and the counter-cyclical policies currently deployed by a Republican administration. You might even say that these ideas represent extremist idiocy.
But you would then have to explain how they have informed Republican programs for a generation—think of the recent Congressional opposition to the bank bailout—and, more important for present purposes, how they have shaped the debate, such as it is, among economists about the precedent of the Great Depression: the consensus view on that disaster is derived from Friedman’s definition of it as a normal business cycle intensified by monetary policy (the Fed) and egregious “market interventions.” (See my two-part essay, “Their Great Depression and Ours,” here at www.politicsandletters.com and at www.historynewsnetwork.org, forthcoming at Challenge.)
You would also have to explain another consensus that has recently settled on discussions of the silver linings to be detached from the dark clouds that crowd the economic horizon. Here the big idea is that the credit freeze and the coming recession—or is it a depression?—will challenge the gross hedonism of consumer culture by restoring moral rectitude to households that have lived beyond their means for too long. Savings will now replace spending because nobody can borrow anymore, and that is a good thing! No, really, this is the new big idea, from Left to Right and back again. Call it the romance of hard times.
You’ve seen and heard it all over on TV, not just on CNBC: ask Chris Matthews, Mike Barnicle, Brian Williams, Joe Scarborough—just like Peter G. Peterson and every other entrepreneur and economist in view, they say we need less indiscriminate spending, less consumer credit, and more household savings (thus investment) if we are to compete with rather than borrow from China, and, beyond that, if we are to learn the moral lesson of frugality.
Let me cite three significant examples of this new consensus and then tell you what’s wrong with it. George Will celebrates the “new frugality” exemplified by Wal-Mart and its customers—it is clearly the good news folded into the threatening clouds of the gathering storm: “Does anyone doubt that Americans consume too much and save too little?” Before the 1990s, they saved 90% of their after-tax dollars; thereafter their savings rate plummeted, to less than 10% since 2005. Even worse: “They kept their consumption rising not only by scanting saving but also by supplementing credit-card debt with home-equity loans.” (Newsweek, November 3, 2008, p. 80)
Martin Wolf, my favorite economist these days, concurs, although the moral imperative at work in Will’s exhortation is less obvious because the Wolf-Man is searching for a way to offset the massive federal deficits required to prevent a globalized catastrophe—to offset deficits that, in view of the scale of fiscal stimulus needed, may reach 10% of GDP. “So how might they [the deficits] end?” he asks. “In the US and other countries with highly indebted private sectors, such as the UK,” he answers, “a return to large private sector deficits would be highly undesirable, even if achievable. A vastly better outcome would be bigger savings and a reduction in current account deficits.” (Financial Times, November 12, 2008, p. 11)
Finally, David Leonhardt, no conservative advocate of the free market, draws the same moral from the story told by the collapse of both credit and consumer confidence. On the front page of the New York Times, he turns George Will’s rhetorical question into a bracing sermon: “Nobody doubts that families need to start saving more than they saved over the last two decades.” After citing the same income percentages Will used, Leonhardt intones: “This simply cannot continue.” And why not? Americans “need to pay down their bills and replenish their retirement accounts” because they can’t bank on their homes to finance their futures. As a result, “the psychology of spending and saving may well be changing,” presumably for the better. (New York Times, November 12, 2008, p. 1)
So the coming economic crisis is already correcting a dangerous deviation from the cultural norm of household saving which prevailed until the 1990s. In doing so, it is already teaching Americans how to defer gratification—how to save for a rainy day instead of indulging every random desire. It is teaching us the error of our ways by punishing our transgressions, by reminding us of our excesses and modifying our behavior accordingly. It is teaching us that market forces are moral imperatives.
Or not. The change of moral season has been so profound since the Reagan renovation of the Republican Party that we start scratching our heads as soon as we’re done nodding in agreement with the conventional wisdom presented by Will, Wolf, and Leonhardt. Is the market a universal moral calendar, we ask, is it an anonymous externality that still sorts the costs and benefits of every action? Can it be the theater in which we find callings that build our characters? Or have we finally separated the potentially moral dividends and the merely economic meanings of the market—so that the conventional wisdom about saving sounds as relevant to our current condition as Cotton Mather complaining about epidemic debt in 1719?
Richard Hofstadter thought we had already separated these meanings more than fifty years ago. In the great work of 1955, The Age of Reform, he concluded that “The generation for which Wilson and Brandeis spoke looked to economic life as a field for the expression of character [whereas] modern liberals seem to think of it quite exclusively as a field in which certain results are to be expected. It is this change in the moral stance that seems most worthy of remark.”
Between then and now, however, the supply-side revolution and its collateral intellectual damage have rehabilitated the notion that market-driven behavior serves extra-economic, higher moral purposes—as if God had not failed after all, but had only retreated from a world that could not understand his will.
The most poignant statement of this notion was, and still is, Michael Novak’s Spirit of Democratic Capitalism (1981). Here the bona fide theologian, one of Irving Kristol’s many protégés, argued that “there is a strong consonance between the virtues required for successful commercial and industrial practice and the natural moral virtues” because the “fundamental motive” of market-driven behavior is “family-regarding.” Indeed he insisted that “the most profound of economic motives is almost always—and must necessarily be—family-oriented.” This is a compelling argument, of course, but only insofar as the traditional nuclear family functions as the moral anchor of modern economic man. In its absence, all bets on the future of capitalism are off. Perhaps that is why we still try to read that uncertain future in the fractured state of the family.
Certainly that is why Joseph Schumpeter doubted that capitalism had much of a future. In the massive two volumes of Business Cycles (1939), he noted that “capitalist evolution not only upsets social structures which protected the capitalist interests . . . but also undermines the attitudes, motivations, and beliefs of the capitalist stratum itself . . . [for example] the loosening of the family tie—a typical feature of the culture of capitalism—removes or weakens what, no doubt, was the center of the motivation of the businessman of old.”
When understood as Hofstadter and Schumpeter—and the rest of us modern liberals—would like, as a historical phenomenon rather than a theological problem, the market appears to us not as an inscrutable, impenetrable, external form of Providence which serves familial purposes, but rather as a malleable set of forces subject to human intentionality and social purpose. It is no longer a fixed moral compass or universal calendar; it is a cultural system, to be sure, but it has merely economic meanings. This view of the market seems to have prevailed in the various stages of the bail-out package proposed by the Treasury Department and passed by the Congress since last summer—everyone from Henry Paulson to Nancy Pelosi is repeating after Robin Williams in Good Will Hunting: “It’s not your fault.”
And yet the strictly economic meanings of private savings are still at issue, even after we dispense with their potentially moral dividends. As the new jeremiads remind us, the baby boomers had better start saving for that rainy day when they retire. But not so fast. “Nobody doubts that families need to start saving more than they saved over the last two decades,” Leonhardt claims, and then goes on to hedge this bet: “But if they change their behavior too quickly, it could be very painful,” because rising consumer demand is the engine of economic growth as such. So the macroeconomic question remains—what are savings for, anyway? They’re a good idea if you want to retire before you’re dead, it seems, or if you want to get right with Cotton Mather. They’re a bad idea, it seems, if you want to promote economic growth. Are then the moral dividends and the economic meanings of market-driven behavior now at odds? If so, what is to be done?
Once upon a time, household savings were collected by banks as demand deposits, which in turn loaned these surpluses to business firms in need of relatively short-term credit. Now household savings flow mainly to pension and mutual funds, which “loan” these surpluses differently by building long-term portfolios of stocks and bonds for their clients; those funds can cash out any time by selling such securities, however, so the pool of capital available to business firms is more fluid, more variable, less predictable. In either case, household savings are supposed to be transferred by the financial system to active, productive, profitable use in the form of private investment.
This sequence informs all economic theory and public policy, from Left to Right and back again. That is why tax cuts have such a grip on the imagination of policy-makers. They assume that if you increase the pool of private savings through tax cuts, you increase, by roughly the same amount, productive investment and thus job growth, per capita income, and consumer spending. In this sense, all public policy is the enactment of “trickle-down” economics—savings come first, from households and business firms in the form of after-tax earnings or profits, then comes investment, and only then come job growth, higher per capita incomes, and increased consumer spending.
The problem is that the sequence posited in theory and validated by policy has been rearranged, perhaps even reversed, by historical change since 1919. Suffice it here to say that economic growth has proceeded as a function of declining net investment for the last 90 years unless national emergency or war has created insistent demand for public investment in “human capital,” infrastructure, and/or military hardware, as happened in the 1930s, 40s, and 50s. In this counter-intuitive but measurable context, increased private savings, whether from households or business firms, are more likely to flow into speculative bubbles than into productive investments, as happened in the 1920s.
Why, then, should we be celebrating the “new frugality” imposed by hard times, particularly if we have moved beyond the moral universe plotted by Milton Friedman, Friedrich von Hayek, and Michael Novak? Why should we be hoping that the current economic crisis will teach us to defer gratification in the name of rediscovered virtue? Shouldn’t we instead be searching for ways to increase consumer spending as against household saving? Shouldn’t we be searching, in other words, for ways to reconstitute consumer culture in the name of economic recovery?
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peter jones - 4/21/2009
Have you heard about the Savings Bank American Express is building? Don't believe me? Call 1-800-446-6307 and see for yourself. Also interesting that Ken's strategic planning group are working on the project but only one first year analyst and a manager are assigned to it.
James Livingston - 11/29/2008
Hayek's "must" is the key--says who? Net investment was declining in the 1920s, but growth was spectacular. Shouldn't have happened according to H's faith-based system, but it did. What should we say about this counter-intuitive convergence? That it is impossible? OK, in theory, it is impossible. Doesn't change the facts. No more than saying that the earth must be the center of the universe changes the fact that the earth revolves around the sun. Yes, it is a matter of paradigms. H's won't allow for the anomalous data, mine does. What's more real, speaking of economic realities? H's paradigm or the data? It sounds to me like you'd vote for the former even when confronted with the anomalies. Take a look at chs. 1 and 4 of my 1994 book, see what you think.
William J. Stepp - 11/27/2008
Suffice it here to say that economic growth has proceeded as a function of declining net investment for the last 90 years unless national emergency or war has created insistent demand for public investment in “human capital,” infrastructure, and/or military hardware, as happened in the 1930s, 40s, 50s. In this counter-intuitive
but measurable context, increased private savings, whether from housefolds or business firms, are more likely to flow into speculative bubbles than into productive investments, as happened in the 1920s.
This "counter-intuitive context" is not just counter-intuitive. First, an economy (or catallaxy, to use the better Hayekian term) can only grow if net investment grows. If it falls, than the catallaxy must necessarily contract, as it did during the Great Depression. You also overlook the massive investment in intangibles the last few decades, presumably because they are not well captured in whatever stats you might have perused. For more on intangibles, see Leonard I. Nakamura, "What Is the US Gross Investment in Intangibles? (At Least) One Trillion Dollars a Year!", Federal Reserve Bank of Philadelphia, Working Paper No. 01-15, Oct. 2001.; and Baruch Lev, _Intangibles_.
Second, to assume that private savings "flow into speculative bubbles" is to put the cart before the horse. Speculative bubbles are not some ethereal thing floating around that misguided investors pour their savings into. On the contrary, they can only come into being as a result of misguided savers putting money into what look like good investments thanks to artificially low interest rates that make investments appear to be worth more than they really are, thanks to the systematic overvaluation of their underlying discounted cash flows. When rates rise to reflect the actual state of economic reality, the investments are revealed to be malinvestments, which can't come to completion and which then must be liquidated or restructured. The misdirection of resources, both capital and labor, is reversed and unemployment of both is the result.
As for connecting the dots from Cotton Mather to Friedman and Hayek, as an ex-WASP-turned-WASA (anarchist/agnostic), I can't vouch for the former. Friedman and Hayek, while they had incompatible macroeconomic views, did agree on much else, including, I gather, Hayek's insight in chap. 10 (I think) of _The Road to Serfdom_, "Why the Worst Get on Top." Presumably that insight describes the current U.S. regime. And didn't Keynes describe himself as "in deeply moved agreement" with that insight? Aren't a lot of us?
Jules R. Benjamin - 11/26/2008
James, great analysis but you fade out at the end. If you are challenging the idea that the bursting of a debt bubble set off the dominoes of economic collapse, you don't put forward another explanation. On the practical side, the actual operation of our economic system, you also leave unanswered why major banks and finincial institutions consciously drove (while drinking)the debt locomotive by enticing consumers to buy "no money down." I still see this kind of advertising even as the Bushvills fill with people carrying default notices. Since all of the economic wise-guys agree that we have fallen off the leverage cliff, why do they only challenge red-ink hedonism for consumers? Why don't they tell advertisers (and their army of psychologists) to stop pushing the hard stuff on the public? Then it would not be so difficult for consumers to control their buying binges. This is especially so since the latter is, as they tell us, the cause of the massive spill of toxic assets in which we now flounder. Why have you made no place for the contradictions (or unreason) of the economic system . After all, the new found moralizing of the neo-cons arises along with the growing "cleavage" noticeable in the marketplace: the temple of hedonism.
Judith Apter Klinghoffer - 11/24/2008
Of course, that is the reason Bush told us to go shop after 9/11 and we got checks to go shopping. You may be interested in my take on the American consumer http://hnn.us/blogs/entries/57356.html
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