Wild man’s world is cryin’ in pain, what you gonna do when everybody’s insane? Ok, so Ann and Nancy Wilson of Heart were singing about someone that they love, and I have little love lost for the subject of this blog – Dr. Paul Krugman. I have long disagreed with Dr. Krugman’s peculiar version of economics, and I knew that he was borderline crazy when he said on one of the Sunday morning television shows, that an alien invasion would be good for the economy. Generally though, I try to ignore his musings as the political writings that they actually are.
But this morning, I felt a need to get my blood pressure up so I took a look at Dr. Krugman’s blog entry. In it he had a graph of data taken from the Federal Reserve showing the level of personal savings in the United States juxtaposed against private investment. The graph showed personal savings rising over the past 10 years and investment collapsing through the recession and recovering but slowing in the subsequent months. The good doctor argues that this proved that low interest rates in the United States were the simple result of supply and demand. There was too much savings chasing too little investment. As such the price of money (or interest rates) was falling.
We have long argued on this blog that one of reasons for slow economic growth is the policy focus on consumption over investment and savings. This is precisely the policy that Dr. Krugman supports for just about any economic malaise, and what he is trying to justify with his graph. Unfortunately for the poor uninformed readers of his Conscience of a Liberal blog (that is the US definition of liberal) he left out one important piece of the picture.
This table shows the missing piece of the puzzle. The upper lines replicate Dr. Krugman’s data. Net private savings has been slowing increasing since the recession, and there was a big decline in private investment. This has opened up a $1 trillion gap between private savings and investment. Now the question is what caused this – was it a lack of demand for capital, or was it the rapid desire of Americans to save at negative interest rates? Nature abhors a vacuum so there must be a cause. In comes the bottom line of the graph. Seems that the government deficit has widened by almost exactly the same $1 trillion figure. In other words, just as economic theory predicts, there has been a crowding out of private investment by government spending.
Looking at the complete picture tells me that Dr. Krugman is indeed crazy – crazy like a fox.