Problem in economics


The publication of the new Social Security Trustees Report, coupled with a New York Times article on what seems to me to be a rather silly debate on inequality, made me rethink the lack of self-reflection in economics. We’ve seen a 180 degree turn in understanding one of the most fundamental economic issues, but there’s hardly anyone anywhere saying something like “yeah, we got it wrong, and here’s why” .

I’ll get to the contradiction in a moment, but first I want to explain why I think the debate that was at the center of the Times article is rather silly. The essence of the debate in the article by Neil Irwin (the Times reporter who wrote the article) is whether inequality leads to lower interest rates, which leads to greater inequality of wealth, or if the big problem is the low interest rates themselves causing wealth inequality. .

In my opinion, this is a silly debate, starting from the idea that we must be concerned about the inequalities of wealth resulting from low interest rates. This one is a little hard for me to see.

To be clear, there is no doubt about the relationship between interest rates and wealth, as traditionally defined. Low interest rates increase the value of assets like homes, stocks and bonds. In the latter case, the relation is literally definitional. If a very long bond pays a coupon of $ 10 per year, it will be worth around $ 250 when the long-term interest rate is 4.0%, but $ 500 when the rate is 2.0%. The question is whether we should be concerned when all of the rich see their stocks, bonds, and to a lesser extent their homes, double in price when interest rates plunge.

I know this provides a lot of water for academic papers and for foundations that are ostensibly concerned about inequality, but I’m just struggling to see the problem here. Part of the story is that I somehow doubt that any of these people will celebrate the reduction in inequality if the going the other way around – we have seen a sudden rise in interest rates and the stock market fell 50% (celebrants were not very visible in the 2008-09 crash).

But the biggest problem is that I just consider their accounting to give a very incomplete picture of wealth. For the vast majority of middle-income people, wealth reflects the ability to meet the needs they face over the course of their lives. They accumulate wealth to cover the cost of their retirement, their health expenses, especially in old age, and their children’s education. Middle-class people rarely accumulate substantial sums beyond these needs.

If not already evident, these needs are also often met by government-provided social insurance, such as Social Security, Medicare, and, in countries other than the United States, colleges and publicly funded universities. Indeed, for the middle classes, social insurance is a direct substitute for wealth.

In many cases, this substitution is quite self-explanatory. In a country where the wage replacement rate is high for its social security program, workers do not need to accumulate large amounts of wealth in 401 (k) to support themselves in retirement. The same is true if one can count on public health programs to pay for their health expenses. And, they don’t need to save for their children’s college whether it’s free or cheap.

We could of course view these benefits as “wealth”, but then the story of low interest rates causing inequality would largely disappear. Middle-class workers would see the value of their social security and retirement benefits skyrocket when interest rates fall, just as bond prices soar. The whole problem of interest rates at the origin of inequalities then disappears.

Okay, but I don’t really want to destroy the basis of a major academic debate, just noting why I don’t see the problem. (I also find it hard to see this as an inequality problem when tens of millions of middle-income homeowners can save thousands of dollars a year on their mortgage, car, and credit card payments. But, this is just me.) Anyway. , let’s get to the bigger question.

It really should be a joke, but it is now a central question in economics. The reason this should be a joke is that the answers give images of the economy that are at 180 degree contradictions with each other.

The story of too many savings is that we don’t have enough demand in the economy. If our main economic problem is that we save too much, then we are helping the economy, which means that we will have more growth and more jobs, if we spend more money.

If we are in this world, we should be worried that budget deficits are too small, not too large. We should be very happy to give low and modest income families extra money to support their children and provide them with a decent standard of living. (We should be happy anyway, but if our problem is that we are saving too much, then that money should not be a trade-off with other expenses. We are not under any constraints, so there is no reason. not to make these payments.)

President Biden’s investment proposal looks particularly good in the history of excessive savings. If the problem is that we don’t have enough spending in the economy, why don’t we spend all the spending necessary to quickly build the infrastructure of a green economy, as well as to provide workers and businesses with grants to encourage them to quickly switch to electric cars and trucks and clean energy sources for their homes and businesses.

And of course, we should want to improve the skills of the workforce by supporting free short term community colleges and long term preschool and child care.

And we also need to strengthen our care economy, with increased support for home health care and other forms of care for the elderly and people with disabilities, as well as improving working and working conditions for people with disabilities. people employed in the sector.

If the main problem with our economy is that we are saving too much, we basically have the green light to fix all kinds of problems that have been going on for decades.

Extract: “The problem of the path that goes up in economy”

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