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Over the transom this evening (which means, I got sent a link) comes this remarkable call for more consumer spending. Economic historian James Livingston argues in the New York Times that you can’t rely on investment to grow an economy. You need consumption instead. Its climactic paragraph:
Consumer spending is not only the key to economic recovery in the short term; it’s also necessary for balanced growth in the long term. If our goal is to repair our damaged economy, we should bank on consumer culture — and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending.
As a historian I would expect Prof. Livingston to be aware of the writings of John Maynard Keynes. As I read this article I recalled a famous radio speech Keynes gave on the BBC in 1931. (The speech is in a collection of writings and speeches titled Essays in Persuasion.) Let me illustrate that Prof. Livingston is channeling the great man himself, then why the situations are so different in 1931 and 2011.
There are to-day many well-wishers of their country who believe that the most useful thing which they and their neighbours can do to mend the situation is to save more than usual. If they refrain from spending a larger proportion of their incomes than usual they believe they will have helped employment. If they are members of Town or County Councils they believe that their right course at such time as this is to oppose expenditure on new amentities or new public works.
Now, in certain circumstances all this would be quite right, but in the present circumstances, unluckily, it is quit wrong. It is utterly harmful and misguided…
Note that in economics a basic notion is that savings and investment are two sides of the same coin. Savings can be private or public; both provide a supply of funds to be lent in financial markets to those wishing to build new capital. Prof. Livingston would argue this matters not a bit, and to make his point he cites the decline in net non-residential business investment. But economics also teaches that as economies advance this number naturally falls. What makes it grow rapidly is the productivity of new capital. It had been strong in the early part of the 1920s, but fell as radio had taken full hold of the U.S. communications industry. And secondly deflation was a strong part of the 1930 economy. This is not true today.
The U.S. economy has lower net investment because it has a larger capital stock. That stock depreciates and needs to be replaced. As we do so, we incorporate new technology. In some sense we can never replace capital because the capital we buy is different vintage and better technology. This means that productivity is enhanced by gross investment, not net.
Keynes was just getting started in that speech, though, and I’m sure his oration reached a peak when he started to plead for housewives to spend.
Therefore, O patriotic housewives, sally out tomorrow early into the streets and go to the wonderful sales which are everywhere advertised. You will do yourselves good – for never were things so cheap, cheap beyond your dreams. Lay in a stock of household linen, of sheets and blankets to satisfy all your needs. “And have the added joy that you are increasing employment, adding to the wealth of the country because you are setting on foot useful activities, bringing a chance and a hope to Lancashire, Yorkshire and Belfast.
Again, things are not cheap, and household savings is currently at an ebb, not high tide as Keynes imagined in 1931. The graph to the right is of household net worth between 2001-11. Households have deleveraged and are trying to save for their futures. In 1931 the linens and towels that Keynes exhorted housewives to buy were falling in price. Since they were semi-durable you could earn a positive return by laying up linens in the closet. This is not true today. Goods are not on discount — if anything, goods prices will continue to fall as world trade makes more and more goods accessible to more and more of the developing world’s middle class — and to us. They are only on discount if rampant inflation appears, which it might. If it does, the savings in the graph becomes worth less and less, and will inspire more savings, to Prof. Livingston’s apparent chagrin.
Keynes’ advice was for a world of depressed trade, deflation, and unleveraged homes. Not so today. Sometimes historians repeat history without worry of its application to our present troubles.