Saturday, November 06, 2010

Krugman is part of the problem

This post totally sums up the problem with macroeconomics, and by extension, Krugman:
The simple fact is that we have a global excess supply of savings, which is doing terrible things to workers. The reasonable thing is to do something about it; it’s deeply unreasonable, and deeply irresponsible, to invent reasons not to act because you’re clinging to simplistic slogans.
Got that? Households are groaning under impossible debt burdens, they've seen their income cut and their job prospects dim, and the problem is that they have too much money in the bank.



Blogger The Arthurian said...

Winter, I'm with Krugman on this one. One way to describe the problem is as an imbalance between spending-money (M1, say) which is extraordinarily low, and savings (say, M2-M1) which are extraordinarily high. This imbalance creates both the need to use credit and a source of funds to lend, at least in my view.

I wouldn't say it's the same people who are both deeply in debt and flush with savings; but even if that were the case, we might still come to rely excessively on credit and find ourselves groaning under impossible debt burdens. For the more precarious the economy, the more urgent the desire to protect one's wealth. This problem does not fix itself.


6:28 PM  
Blogger dave said...

You are completely missing his point. He's talking about the top 2% of wealth holders, who hold a ridiculous amount of money as savings and cash flowing bonds which do nothing for the workers and don't reach them as investment. Furthermore, only gov't spending acts to get currency to those workers, but the rules of the game (set up by the top 2%) insist that gov't(s) must balance spending with revenue. Krugman isn't perfect but in this case he's exactly right, even if he isn't coming out and spelling it out for us.

8:23 PM  
Anonymous Anonymous said...

Surreal but true. What explains the apparent contradiction of "households groaning under impossible debt burdens" and "they have too much money in the bank" is explained in the latest piece by another Times columnist, Nicholas Kristof:
The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976... the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.

Its the difference between median households (overburdened with debt) and households in aggregate (too much money in the bank).

3:14 AM  
Blogger JKH said...


This is standard paradox of thrift stuff.

Micro perceives more saving as the solution. That becomes a problem for macro.

The macro problem is excess saving at the expense of aggregate demand and jobs.

What’s the big deal?

5:25 AM  
Blogger Greg said...

Could he not be right in one sense, that there is a very small group of people, less than 10%, doing ALL the saving and the other 90% in hock up past their eyeballs. I realize that for every saver there is a debtor in aggregate but the distribution is what is creating the logjam no??

Those with the debt dont have the income to service it and still consume while those with the savings see no reason to save less since they are consuming all they want already.

Of course, this is where we must realize that the way out is NOT austerity but increased govt debt to fund the savings desires and provide income.

6:01 AM  
Blogger winterspeak said...

LOL! Not too many fans of this post :)

The standard paradox of thrift story is about flows, but not explicitly so, and it often gets applied to stocks as well. Saving can mean "not spending" (flow) or net financial assets (stock). What we have now is too much saving (flow) because we have too little saving (stock).

There is a simple solution to this problem which Krugman never mentions. Anyone? Anyone?

INEQUALITY COMMITTEE: Inequality increase is driven by the Finance industry, and concentrated at the very top of the very top. It would have been super if Obama had chosen to regulate finance, but he has not. I will not conflate the Government sanctioned theft that enriches bankers with any broader discussion of inequity. Poor old Todd Henderson has a point!

9:49 AM  
Blogger The Arthurian said...

Wow, I really don't understand your view at all.

What we have now is too much saving (flow) because we have too little saving (stock).

In other words the rate-of-increase of accumulating savings is too high "because" the level of accumulated savings is too low.

I don't understand the "because" there, but that is minor.

I definitely don't understand how you can say the level of accumulated savings is too low. It is too high now, as it was at the time of the Great Depression.

Unless you mean by 'too little accumulated stock of savings' that there is not enough credit for investment? In which case your "simple solution" would be to eliminate the remaining tax deductions for interest expense from the individual income tax form. But I can't believe you are that short-sighted.

[name withheld due to embarrassment]

11:49 AM  
Blogger Rogue Economist said...

Big problem, indeed. The more that people have to save (flow) because they have too little saving (stock), the more that saving comes at the expense of aggregate demand and jobs, netting to even less saving (stock).

11:55 AM  
Blogger JKH said...


Fan of the post here -

NFA can be a flow or a stock. It’s a flow with respect to the deficit and a stock with respect to the debt. NFA flow consists of increments to reserves, currency, and bonds.

But you’ve obviously been hanging around MMT too long.

The pertinent stock for the paradox of thrift is wealth (net worth, equity). That includes not only NFA, but total cumulative saving (marked to market usually) generated by cumulative real investment as well. The stock of NFA is a subset of the total stock of non government net worth or equity.

Investment, total saving, net saving, and NFA are all flows over a given accounting period that cumulate to balance sheet stocks at the end of the period.

The paradox of thrift comes about when the combination of real investment flow and NFA flow don’t generate the total saving flow that the private sector desires.

MMT prescribes that government provide additional discretionary NFA flow to fill the gap.

2:59 AM  
Blogger winterspeak said...

Arthur: I'm simply pointing out that, when the typical household looks at their balance sheet, their "equity" entry is too small. Maybe it's because their house is worth less, maybe it's because they've lost income and drawn down savings, maybe it's because the rainy day fund suddenly looks too small. So, their savings (stock -- net financial assets) is too low.

Therefore, they spend less of their income (ie. save more -- flow) trying to rebuild their stock. Paradox of Thrift calls this increase in savings (flow) excess savings.

JKH: Really? Paradox of Thrift always struck me as being a velocity issue -- ie. focused on flow dropping below what's need to generate sufficient AD for full employment.

I thought it was a feature of the Paradox to not include stock, as there can be many reasons for the flow change, some of which may have little to do with the underlying stock level.

It sounds like you agree that you get a Paradox of Thrift when total savings flow is too small. I don't see what that has to do with stock in general (although in this particular case I'm tying direct causality between them).

1:19 PM  
Blogger STF said...

Saving = flow
Savings = stock

2:13 PM  
Blogger JKH said...


I think at the end of the day we should be in agreement.

“Focused on flow dropping below what's need to generate sufficient AD for full employment”

Right - my last two paragraphs above are consistent with that.

“I don't see what that has to do with stock in general”

My point on stocks started from your comment “Saving can mean "not spending" (flow) or net financial assets (stock).” I summarized some stock/flow relationships to emphasize that net financial assets can be a saving flow component, and also that saving flow includes much more than net financial assets – i.e. a clarification on MMT NFA in context. I think it’s fair to say that when US households take a $ 15 trillion or so hit on their net worth, it has something to do with their new found interest in saving from income (flow), along with loss of income from unemployment of course. Although the paradox of thrift operates as a flow, there is a stock consideration behind its motivation at least in part. The relevant stock in that sense is total cumulative saving (i.e. net worth), not just the NFA component of it. I suspect you’ll agree with this.

As Scott notes, savings is the stock corresponding to saving as a flow.

Savings is also equal to cumulative saving flow.

6:51 PM  
Blogger winterspeak said...

Cool. So when krugman talks about the global excess supply of savings does he mean stock or flow? The "s" suggests flow as per STF. So does the fact that none of his solutions address the stock problem at all.

This makes him part of the problem

7:44 AM  
Blogger JKH said...

It looks like he’s talking mostly about saving as a flow.

But he’s sloppy about it, reverting to "savings" more often than not.

E.g. "For the world as a whole, savings must equal investment, or, equivalently, spending must equal income."

Very sloppy - he's referring to flow equations, but using "savings".

He refers to savings correctly only implicitly and very indirectly – in terms of de-leveraging. De-leveraging uses the flow of savings to improve balance sheet equity - which is the same as improving savings.

This is being picky about terminology I suppose, but there are standards for correct communication, as Scott noted.

Krugman’s posts seem generally irritable, rushed, and sloppy lately. He should take some time off at his place in St. Bart’s.

8:59 AM  
Blogger JKH said...

"savings must equal investment, or, equivalently, spending must equal income"

I suppose he might have been referring to stocks in the first part, except that just before that he refers to "savings and investment" schedule, which I believe is quite wrong - the schedule is for flows, not stocks

It's a problem.

9:09 AM  
Anonymous Anonymous said...

Winterspeak, I liked the post, though my first reaction when reading Krugman's post was to slightly different aspects.

I agree with JKH that Krugman's post is sloppy, intermingling discussion of saving(s) as a stock versus flow in inconsistent ways. But the bottom line is he seems pretty clear that the villain is "excess SUPPLY of savings" (a stock). That seems very wrong, as it's not the absolute amount of stock that matters, but whether any of it starts flowing (i.e., a reduction in savings rate that would contribute to demand). On the plus side I think he recognizes that there are alternate potential flow increases available also (government deficits and net exports).

His graph also strikes me as problematic. In trying to figure out if it was loanable funds, IS-LM, or something else, I came across a couple older posts of his that seem to be on the same topic of excess supply of savings:

I'm not an expert on IS-LM etc but some quick searches show me that Bill Mitchell says it is irrelevant and should only be taught as part of economic history.

Very much related... I recently wrote something up from a MMT-inspired balance sheet perspective regarding liquidity preference, interest rates, etc that seems logical to me but that I haven't seen elsewhere, but haven't gotten any comments yet. Anyone care to comment on whether it makes sense? (Winterspeak? JKH?)

12:44 PM  
Blogger JKH said...


Became intrigued by your post. Will leave a comment there in due course.

5:37 AM  
Anonymous Anonymous said...

JKH, I very much look forward to your reply (whether or not you find fault with the post). Since writing it I've had some thoughts regarding how the dynamic I tentatively described would likely function during Minsky style asset bubbles (like the recent one), but am saving those for now.

10:35 AM  
Blogger Jim Baird said...

" He should take some time off at his place in St. Bart’s."

No, he's in St. Croix - he's a neighbor of Warren's (although apparently Warren hasn't yet been able to get through to him...)

1:53 PM  

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