Perhaps the model where there's plenty of savings available but inelastic business opportunities/investment demand might also explain something quite different, the pitfalls of pension privatization.
El Salvador on the 90's privatized pensions following the Chilean model where the savings of the workers were meant to dynamize the capital markets (and generate growth).
However, the equity market hasn't been a source of finance for Salvadoran companies.
The pensions have been invested mainly on bonds with returns of around 5%, inferior to the US stock market benchmark.
In less than a decade, the initially 5 private pension funds became a duopoly, perhaps because of the small size of the market (Country of 6 million people with only half of the workers on the "formal" economy).
Real growth of the economy never really picked up above 2% on average, and wages have remained largely stagnant.
Even back on 2005, Rodrik & Hausmann published a paper arguing that the real bottleneck of the economy was the incapacity of discovering profitable business opportunities.
So, when I saw that graph, a light turned on inside me: Privatizing pension, at least in my small country, was basically taking the money away from the little Timmys and into the Scrooges, with low returns to Tim.
The idea that poor people waste money given to them has been disproven by numerous studies showing the efficacy of cash transfers. It's also classism, pure and simple.
Noah, I love it when you call out these editorials from the WSJ and explain why they’re wrong. I find myself gritting my teeth these days when I read their editorial pages. Sometimes the articles from their editorial board read like a Tucker Carlson monologue. Is it just me? Also, is a lack of profitable investment opportunities due to a lack of consumption growth? If yes, does that make the case for govt. investment leading to better higher paying jobs and boosting consumption stronger?
This was great, didn't go where I thought it would at first. My first reaction that I was curious about: isn't it better if it takes a while for the money to get to the savers? Like, if the $600 goes to Tiny Tim, who spends it right away on a need, doesn't it eventually end up in the hands of a saver after passing through some number of transactions? So, you get the benefits of saving in the end anyway, but in the meanwhile, it produces a lot of immediate value too?
This post was like a little Xmas gift! You answered all the questions that popped in my head. But the one I’m interested in most is the last one, the moral question. It’s notable that human beings have held similar moral responses to inequality like forever (the Bible, Dickens, etc), and we can definitely argue that capitalism, fueled by resource extraction and technology, have enabled us to follow through on this innate repulsion against unfairness. (On the whole, we live in the most equitable, wealthiest, and safest period in human history.) Yet inequality is like a zombie monster that keeps coming back, each time shifting shape and devouring our minds and social integrity.
What I would love to see is some kind of quantification or standardization of emotional capital, including our moral responses, and how that would impact the society, as you posed in your question, “would that [giving $600 to Scrooge to grow economy] be worth taking $600 away from a poor little kid like Tiny Tim?”
In other words, can we calculate the cost of the $600 away from Tiny Tim in, say, increased likelihood of political instability, decreased productivity due to depression, addiction, etc.?
And how about changing the metrics in GDP to include measurement of wellbeing like Andrew Yang proposed? I would love your take on these.
Lots of interesting points here. Thank you. Question: You state that the world is awash in savings, but lacking profitable opportunity (maybe a bit tongue and cheek?), Could it be that many of the businesses most able to leverage any opportunity that does exist are actually not engaged in a project to capitalize on them but are more interested in accumulating and hoarding even more more capital/savings (redistributing the largest share of the rate of return to the top)?
Let’s face it. That $600 is going to end up in the hands of rich people anyway. After it passes through the hands of some middle-class people, then some upper middle class people, and then right into the hands of Bezos after Zuckerberg takes his share.
That was good but IMO you missed the biggest point. Economies have a demand side. As you said, "What’s limiting business investment is a lack of actual profitable business opportunities." Actual profitable business opportunities are limited by what people are in a position to pay for goods and services. If they ain't got no money, they can't buy nuthin', and if they can't buy it, you can't sell it. That's one of the bases of Keynesian economics.
If you give $600 to Tiny Tim, and he spends it, he will spend it buying goods and services from businesses. They will have slightly more "actual profitable business opportunities". That's what an "economic stimulus" is. It's solidly known how it works and even what level of multiplier you can expect from giving poor people money. So yes, you should give the money to Tiny Tim; it's hands down better for the economy.
(Incidentally, even if Tiny Tim spends the $600 paying down debt, that would STILL create a stimulus in a way that rich people adding to their savings would not. Slightly slower, but larger. Tiny Tim pays high interest on his debt--probably VERY high interest. Paying down debt creates a stream of not-forgone revenue, interest that he would have had to pay to payday loan leeches but can instead spend on goods and services. It will add up to more than $600 in a few years)
That "Wealthy Hand-To-Mouth" paper (on households which have illiquid wealth, but lack cash) is pretty eye-opening!
This is a great explanation of the "savings glut" theory of why interest rates are so low. But there's other theories, right? For example Mian, Straub, and Sufi talk about "indebted demand," the idea that inequality is a major factor. High levels of debt result in a flow of interest payments from lower-income households to high-income households. They have a lower propensity to consume, lowering overall demand and therefore the interest rate consistent with full employment.
Noah, also consider that the Rich have a cornucopia of means to grow their money. Inside trading opportunities, unique real-estate intel, all kinds of opportunities to grow their wealth that THE POOR DO NOT HAVE. If the poor had opportunities to grow their wealth 15-20% each year reliably, they'd do so.
Tiny Tim gambles and buys into pyramid schemes because he want to invest the way Scrooge does. Tim is deprived of 100% employer matched 401k contributions, and he's deprived of tips for which assets will outperform the market. His deprivation of knowledge keeps his annual returns low, and that's why he doesn't invest. Atlantic City is Tim's flailing attempt to keep pace with Scrooge's returns.
Also note that Tiny Tim didn't choose to be average-IQ, low-conscientiousness, low-energy. If he'd designed his own body, he would have opted for a mensa-IQ, high-conscientiousness, high-energy vessel--one that performs at a high level on 4 hrs of sleep per night. Industriousness is in Tiny Tim's control, but IQ, organization, and energy are not. (ht John Rawls)
I think the better way to think of it is that Scrooge is a clever investor, who is able to efficiently allocate his capital into high personal and ultimately societal benefit. The thing is, that the savings->investment aspect has been very professionalized and depends much less on the saver and investor being the same person than in Scrooge's day. Where we DO benefit from a Hayekian type improvement where Wall Street (in the broad sense) can't optimize is for human capital / durable goods / nutrition. That's all the high ROI of giving young families money that Raj Chetty for example keeps finding.
Also, one of the big sources of moving wealth from today into the future (ie investment) is increasing the housing stock. Which is constrained by NIMBYism. The inelastic supply curve has a lot to do with policy choices. If we make it hard to alter the built environment, it's easy to see how all the growth companies mostly focus on bits not atoms.
Finally, a turbo charged stock market I think can induce more real investments. I mean, look at Tesla's market cap. EVs would happen eventually, but I have to imagine every single car CEO (and Apple) is having extremely serious discussions right now about how to speed up and focus on EVs, and there is a very large pool of capital available to build or refit factories. Or to buy battery start ups, encouraging more VC funding in the space.
Noah, you're a genius:
Perhaps the model where there's plenty of savings available but inelastic business opportunities/investment demand might also explain something quite different, the pitfalls of pension privatization.
El Salvador on the 90's privatized pensions following the Chilean model where the savings of the workers were meant to dynamize the capital markets (and generate growth).
However, the equity market hasn't been a source of finance for Salvadoran companies.
The pensions have been invested mainly on bonds with returns of around 5%, inferior to the US stock market benchmark.
In less than a decade, the initially 5 private pension funds became a duopoly, perhaps because of the small size of the market (Country of 6 million people with only half of the workers on the "formal" economy).
Real growth of the economy never really picked up above 2% on average, and wages have remained largely stagnant.
Even back on 2005, Rodrik & Hausmann published a paper arguing that the real bottleneck of the economy was the incapacity of discovering profitable business opportunities.
So, when I saw that graph, a light turned on inside me: Privatizing pension, at least in my small country, was basically taking the money away from the little Timmys and into the Scrooges, with low returns to Tim.
The idea that poor people waste money given to them has been disproven by numerous studies showing the efficacy of cash transfers. It's also classism, pure and simple.
Noah, I love it when you call out these editorials from the WSJ and explain why they’re wrong. I find myself gritting my teeth these days when I read their editorial pages. Sometimes the articles from their editorial board read like a Tucker Carlson monologue. Is it just me? Also, is a lack of profitable investment opportunities due to a lack of consumption growth? If yes, does that make the case for govt. investment leading to better higher paying jobs and boosting consumption stronger?
this post would be a perfect segue into "Trade Wars are Class Wars"!
This was great, didn't go where I thought it would at first. My first reaction that I was curious about: isn't it better if it takes a while for the money to get to the savers? Like, if the $600 goes to Tiny Tim, who spends it right away on a need, doesn't it eventually end up in the hands of a saver after passing through some number of transactions? So, you get the benefits of saving in the end anyway, but in the meanwhile, it produces a lot of immediate value too?
Great post, reminds me of the distinction between wage-led and profit-led growth in the PK literature
This post was like a little Xmas gift! You answered all the questions that popped in my head. But the one I’m interested in most is the last one, the moral question. It’s notable that human beings have held similar moral responses to inequality like forever (the Bible, Dickens, etc), and we can definitely argue that capitalism, fueled by resource extraction and technology, have enabled us to follow through on this innate repulsion against unfairness. (On the whole, we live in the most equitable, wealthiest, and safest period in human history.) Yet inequality is like a zombie monster that keeps coming back, each time shifting shape and devouring our minds and social integrity.
What I would love to see is some kind of quantification or standardization of emotional capital, including our moral responses, and how that would impact the society, as you posed in your question, “would that [giving $600 to Scrooge to grow economy] be worth taking $600 away from a poor little kid like Tiny Tim?”
In other words, can we calculate the cost of the $600 away from Tiny Tim in, say, increased likelihood of political instability, decreased productivity due to depression, addiction, etc.?
And how about changing the metrics in GDP to include measurement of wellbeing like Andrew Yang proposed? I would love your take on these.
how does san francisco compare to seattle?
Lots of interesting points here. Thank you. Question: You state that the world is awash in savings, but lacking profitable opportunity (maybe a bit tongue and cheek?), Could it be that many of the businesses most able to leverage any opportunity that does exist are actually not engaged in a project to capitalize on them but are more interested in accumulating and hoarding even more more capital/savings (redistributing the largest share of the rate of return to the top)?
Let’s face it. That $600 is going to end up in the hands of rich people anyway. After it passes through the hands of some middle-class people, then some upper middle class people, and then right into the hands of Bezos after Zuckerberg takes his share.
That was good but IMO you missed the biggest point. Economies have a demand side. As you said, "What’s limiting business investment is a lack of actual profitable business opportunities." Actual profitable business opportunities are limited by what people are in a position to pay for goods and services. If they ain't got no money, they can't buy nuthin', and if they can't buy it, you can't sell it. That's one of the bases of Keynesian economics.
If you give $600 to Tiny Tim, and he spends it, he will spend it buying goods and services from businesses. They will have slightly more "actual profitable business opportunities". That's what an "economic stimulus" is. It's solidly known how it works and even what level of multiplier you can expect from giving poor people money. So yes, you should give the money to Tiny Tim; it's hands down better for the economy.
(Incidentally, even if Tiny Tim spends the $600 paying down debt, that would STILL create a stimulus in a way that rich people adding to their savings would not. Slightly slower, but larger. Tiny Tim pays high interest on his debt--probably VERY high interest. Paying down debt creates a stream of not-forgone revenue, interest that he would have had to pay to payday loan leeches but can instead spend on goods and services. It will add up to more than $600 in a few years)
That "Wealthy Hand-To-Mouth" paper (on households which have illiquid wealth, but lack cash) is pretty eye-opening!
This is a great explanation of the "savings glut" theory of why interest rates are so low. But there's other theories, right? For example Mian, Straub, and Sufi talk about "indebted demand," the idea that inequality is a major factor. High levels of debt result in a flow of interest payments from lower-income households to high-income households. They have a lower propensity to consume, lowering overall demand and therefore the interest rate consistent with full employment.
Noah, also consider that the Rich have a cornucopia of means to grow their money. Inside trading opportunities, unique real-estate intel, all kinds of opportunities to grow their wealth that THE POOR DO NOT HAVE. If the poor had opportunities to grow their wealth 15-20% each year reliably, they'd do so.
Tiny Tim gambles and buys into pyramid schemes because he want to invest the way Scrooge does. Tim is deprived of 100% employer matched 401k contributions, and he's deprived of tips for which assets will outperform the market. His deprivation of knowledge keeps his annual returns low, and that's why he doesn't invest. Atlantic City is Tim's flailing attempt to keep pace with Scrooge's returns.
Also note that Tiny Tim didn't choose to be average-IQ, low-conscientiousness, low-energy. If he'd designed his own body, he would have opted for a mensa-IQ, high-conscientiousness, high-energy vessel--one that performs at a high level on 4 hrs of sleep per night. Industriousness is in Tiny Tim's control, but IQ, organization, and energy are not. (ht John Rawls)
I think the better way to think of it is that Scrooge is a clever investor, who is able to efficiently allocate his capital into high personal and ultimately societal benefit. The thing is, that the savings->investment aspect has been very professionalized and depends much less on the saver and investor being the same person than in Scrooge's day. Where we DO benefit from a Hayekian type improvement where Wall Street (in the broad sense) can't optimize is for human capital / durable goods / nutrition. That's all the high ROI of giving young families money that Raj Chetty for example keeps finding.
Also, one of the big sources of moving wealth from today into the future (ie investment) is increasing the housing stock. Which is constrained by NIMBYism. The inelastic supply curve has a lot to do with policy choices. If we make it hard to alter the built environment, it's easy to see how all the growth companies mostly focus on bits not atoms.
Finally, a turbo charged stock market I think can induce more real investments. I mean, look at Tesla's market cap. EVs would happen eventually, but I have to imagine every single car CEO (and Apple) is having extremely serious discussions right now about how to speed up and focus on EVs, and there is a very large pool of capital available to build or refit factories. Or to buy battery start ups, encouraging more VC funding in the space.