I want to try to bring together a few points about which I’ve posted previously. My motivation is to address an important article last week in the New York Times (January 1st) by Neil Irwin and Weiyi Cai. Perhaps its early for such a declaration, but the phenomenon they reveal might require a rethinking of Keynes’s celebrated “paradox of thrift.”
The authors point out that much of the recent stock market boom can be attributed to an inordinate increase in savings. While they do concede that the Fed’s aggressive backstopping of markets has been a factor, they do not emphasize it as much as I have. And in considering their case, I must admit that I have not sufficiently emphasized savings. Let’s take a look at what Irwin and Cai are saying.
They consider data comparing March through November in 2020 to the same period for 2019 and what they reveal is unexpected and extraordinary. First, total income was actually up by more than $1 trillion from 2019. Massive unemployment benefits and stimulus checks explain much of the increase. About a quarter of the increase was income from assets. And despite so many lost jobs, most were lower-paying service jobs. Skilled professionals fared quite well, even if mostly not permitted to leave their homes. Surprisingly, total wages and salaries fell by only $43 billion compared to 2019.
Total consumer spending, however, fell about $500 billion in March-November compared to the previous year. While spending on durable goods (e.g., home gym equipment, some electronics) and nondurable goods (home meals, video games, movie streaming) was up somewhat, the increases were nothing compared to the sharp drop in spending on services. Travel, dining, and other forms of entertainment suffered immensely.
An income bump of $1 trillion coupled with a spending reduction of $500 billion computes to a savings increase of $1.5 trillion compared to 2019. Where does all this money go? Long gone are the days when most of us saved most or all of our money in simple savings accounts. In other words, most “saving” these days go to stocks and bonds, though also real estate, gold, and even bitcoin. Consequently, prices of these and other assets have surged.
Earlier I mentioned Keynes’s paradox of thrift. The paradox he had uncovered was that the privately virtuous act of saving money could, if practiced by everyone, be economically catastrophic. Too much saving means insufficient spending – and this leads to less output, fewer jobs, and…well, you know the rest. But now, with the savings being plowed into the asset markets, there is no catastrophe. For “Wall Street” and its affiliates and beneficiaries, in fact, quite the opposite. Portfolios of the wealthy and otherwise upwardly mobile professionals have been inflating with truly unnatural speed.
Of course, the paradox is still very much present for everyone else – the population often labeled “Main Street.” Without financial assets on which to fall back, they really are hurting economically. And here is where I depart from Irwin and Cai. I believe that they downplay the role of the Federal Reserve to a misleading and excessive degree in support of their savings narrative. In doing so they diminish the importance of inequality and the political instability that results.
Yesterday’s chaos in Washington, while disturbing, is not a one-off. It is likely to be repeated. As long as the Federal Reserve continues to reinforce the Covid-19 savings glut by propping up the financial markets, inequality will only worsen, and instability intensify. Jerome Powell, to his credit, appears to sense this. He has for months been trying to persuade Congress to step up, albeit to no avail. Instead of continued monetary stimulus, rendered ineffectual by the present liquidity trap, aggressive fiscal stimulus, long overdue, is in order.
The Federal government should be exploiting the anemic rates of interest that prevail to undertake an unprecedented borrowing spree. The goal should not only be short-term stimulus, but long run structural changes aimed at addressing inequality, the environment, and the public health crisis. But the political will appears all but lacking. And as inequality grows, politics becomes all the more polarized, further paralyzing the government. It is difficult not to read foreboding into yesterday’s events.