I really don't understand how people still push some version of trickle-down economics. Corporate buybacks are exactly this. Using taxpayer money to fund it only hurts the long term value of the economy.
I really don't understand how people still push some version of trickle-down economics. Corporate buybacks are exactly this. Using taxpayer money to fund it only hurts the long term value of the economy.
This is nonsense. Saving in a bank expands the bank's ability to lend. Saving in treasury bonds finances government operations. Saving in the stock market provides the incentive for VCs to invest in startups. Saving in municipal or corporate bonds finances the leveraged operations of those entities, contributing to better long-term planning. Saving in gold at least turns the money over to someone else who will probably spend it on something more useful than gold. For the most part, saving is investment. Only in niche scenarios does saved money leave the money supply.
Investment often results in money effectively leaving the economy as its multiplier rates are much lower than giving the money to consumers who spend it quickly, usually to small businesses that spend the money quickly.
Outside of niche scenarios, investment opportunities only exist when there is a desire to spend money on a product or service, but no money is available to spend.
> Investment often results in money effectively leaving the economy as its multiplier rates are much lower than giving the money to consumers who spend it quickly, usually to small businesses that spend the money quickly.
A lower velocity of money is not the same thing as a reduction in the money supply.
Increasing a bank's ability to lend doesn't mean they will necessarily do it; the reserve ratio is an upper bound.
Also, even when they do make a loan, it also doesn't mean it will necessarily go towards building or improving productive assets. Sometimes loans go towards buying existing assets (such as houses) in a way that might just result in asset inflation. (As in, for example, stock buybacks.)
The idea of a "global savings glut" is somewhat controversial but not obviously nonsense. We can't learn anything by defining it away.
Otherwise, buying existing assets (such as houses) will increase the price which will trigger increased production of that asset.
Traditional models of money supply were built around agricultural and industrial uses of the money supply, and it's not inherently clear that the current model is yielding anything other than higher asset prices.
And in that situation, it marginally increases the value of everyone else's dollar, increasing the value of their investments.
You can't save money without directly or indirectly investing in something (https://en.wikipedia.org/wiki/Saving_identity)
Haha, maybe 100 years ago when banking still worked like that this would be true. Nowadays bank deposits are probably almost entirely irrelevant for banks' lending capacity, as they just lever outstanding debt and whatever other non-transparent assets they can manage to slap a value on without breaking any laws.
Also, there is no mystery what happens with the wealth accumulated by the 0.1%. Piketty wrote an 800-page book about it. It's just moved abroad where it can not be taxed easily and mostly sits there idle to be passed on to next generations. One would have to be stuck very firmly in the Silicon Valley bubble to think much more than a tiny percentage of this wealth is used to be 're-invested in new enterprises'.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Savings and investments are synonyms in this context. See, eg, the savings identity (https://en.wikipedia.org/wiki/Saving_identity). When Joe Millionaire "saves" some money, he does so by investing it. That's what the word means.
> The problem with giving money to the wealthy is that it doesn't go to startups, it leaves the economy and increases a number on someone's terminal.
That's not how money or investment works.
> The best way to spur economic growth is to give money to people who will spend it quickly
Very possibly, but we're discussing who will invest it, not spend it, and as you note, the rich invest more of their income.
In particular, asset inflation (price of land or stock going up) doesn't increase productive capacity in any material sense.
And, that's what's worrying. How do we measure increase in productive capacity without assuming savings = investment? Also, the consumer price index doesn't measure inflation of assets owned by businesses. Are we assuming the market is efficient at pricing investments when it's actually just inflating?
It seems like this is something economists are likely to worry about. Is there a literature on this?
Correct. I think the definition of savings in economics is wrong. I would suggest that the distinction between savings and investment is in with how much difficulty you can reverse your decision (that is, liquidity of the underlying asset). The boundary is fuzzy, but it is important to consider.
So for instance, if I buy a new production line for cars, I cannot easily sell it (for the same price). I am hoping that it was a good decision, because it's hard to reverse (if I see tomorrow, that people actually don't want cars, I cannot easily start to make tractors). That is a decision which is investment.
On the other hand, if I buy shares in a car company, and tomorrow I see that people don't want cars, I can change my mind, sell the shares, and buy some other company. This is savings, not investment.
The reason why the reversibility is important is because if you are an economic actor and make an irreversible decision (like purchasing/building a production line), then other actors in the economy, who have savings, gain a certain advantage - they can react to your decision. They can follow, or they can avoid your investment, depending on how it pans out.
This follows it's not always wise to invest, to make an irreversible decision. Sometimes it's better to wait - and that is saving. Therefore the distinction between savings and investment is actually very important for even macroeconomics. If you have an economy where everybody is waiting for good opportunity (saving), then there is no economic growth. They still can "formally" be investing (buying shares or other financial instruments from each other), but the irreversible (i.e. real) decisions do not get made.
Right, you're talking about the velocity of money (https://www.aier.org/article/what-money-velocity-and-why-doe...) which I find a fascinating concept.
It does feel like money is pooling, because as corporations buy back their stock, there is also less stock for others to buy. Since a lot of retirement vehicles in America rely on buying stock, specifically the S&P500, this can really be tricky. Many companies have resisted going public, get bought out by private equity, etc. Private companies are very hard to invest in, requiring a certain amount of wealth and connections. But I think this is why we're in a huge easy VC money startup economy. The money is looking for a place to be invested, and as some analysts say, TINA - there is no alternative, that is, they need to be invested, but the price of assets they can purchase is getting worryingly high.
https://www.bloomberg.com/opinion/articles/2018-04-09/where-...
Actually the relevant concept is the marginal utility of wealth:
https://www.economicshelp.org/blog/12309/concepts/diminishin...
The problem I see is that the money almost exclusively goes to startups. In the last 10 years the startup scene in the US has been doing very well - not in terms of profits but in terms of funding. This giant "pool of money" created by the FED however mostly benefits just a small part of the workforce: Notably the engineers, scientists, managers, lawyers, investment bankers, etc. in the startup hotspots: In cities like SF, NYC, Seattle, Houston, etc. This is a problem for society because while wages for some parts of the workforce keep growing other workers are left with stagnating wages.
It's only in the middle case (which I think is the most rare of the three) where the share buyback money ends up as savings. (And even there, it's likely in government bonds, lowering the cost of government borrowing when done in aggregate.)
There are more complex analyses, but the above one gets the job done.
You are arguing that non-governmental investment/stimulus in the depths of a recession is a bad thing?
> Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.
If you were aspiring to be the next Bezos or Gates, you too might be inclined to support tax policies that would benefit your future self.
Socialism isn't an absolute, it's a spectrum. Most people don't seem to care about the lack of privatized fire fighting as it existed in ancient Rome.
In my business, almost all of my employees are low-skill. I pay everyone at least a living wage and it's impossible to ignore the realities of their lives. When I make more money, it goes to our savings. When I give an employee a raise, they buy something they need immediately, like a new car or new clothes.
In fact, due to fractional reserve banking, a multiple of the amount put into a savings account is loaned out and spent!
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
When “gains every quarter” are the goal and the measure of “gains” is finance, if you own all the valuable assets up for trade in the finance market...
But that’s ridiculous!
Humans are not and never will be rational actors. They carry their childhood memes with them for life via their brains. Offer some science that refutes it if you got it, but the functional processes of literal reality trump our conscious gut and that’s a well debated fact of human behavior.
The narrative has always been “protect inherited power.”
We see Tonight show hosts, religious true believers, true believers in capitalism, etc stand up to protect the “torch” they’ve been handed. Symbolism above all else.
Finance is another source of illusory power that we have a habit of blindly bestowing on others for emotional feels, before utilitarian value. Not saying that’s good or bad, it’s just what I find to be a reasonable summarization.
What a shock! Tim Cook and the rest aren’t investing in r&d. But their era was corporate micromanagement. Business of financial economy. Not nation state building and rivalry, which flooded the economy with public investment dollars via high taxation.