The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [134]
Things that have to balance always, after the fact, do balance, and this includes the deficits and surpluses of the different groups in the economy—individual households and businesses, the government and foreigners. With a huge government budget deficit in both countries, and low savings on the part of the household sector, inflows of financing from foreign investors have been keeping the national financial accounts in balance. There is no chance of the government deficits vanishing quickly. Foreigners are losing their appetite for investing in the two countries, although not (yet) catastrophically quickly. How this rebalancing will come about is another matter. The most likely mechanism is that the dollar and pound will fall sharply in currency markets, causing inflationary pressures, which will lead the two central banks to increase interest rates. A more appealing mechanism is if the returns on investment opportunities such as equities and corporate bonds rise due to productivity gains and innovation, but it would be risky to count on that—and anyway, if that were to be the case the foreign investment would still be around too.
So increasing saving by the private sector is partly a question of macroeconomic adjustment in big deficit countries like the United States and United Kingdom. But there needs to be behavioral change on the part of individuals as well. Saving in order to invest in the future is an important characteristic of a healthy economy and society. The Nobel economist Paul Krugman (in one of his nonpolemical outings) wrote a profound paper about what it is about a society that delivers economic growth.8 Why are some dynamic and others stagnant? He presented this as a formal endogenous growth model, in which the path the economy takes is described by a series of equations that capture the way inputs of capital, labor, and human capital (that is, people’s intelligence, skills, and knowledge) are turned into outputs of goods and services, and the way investment in both physical and human capital comes about. Two parameters turn out to be decisive in determining whether the economy is trapped in a vicious cycle of stagnation or achieves a virtuous circle of investment and growth. The first reflects the shadow of the past—whether people’s decisions are heavily affected by the weight they put on past experience. The second reflects their expectations for the future—are they confident about the likely returns on their current activities and do they think the future is important? Growth is in a sense self-fulfilling. An economy is dynamic if the people who constitute it think it will be.
In recent times, British and American consumers (as a whole) have demonstrated scant interest in the future. The bill for this irresponsibility is due. A change in expectations and attitudes is overdue.
People’s behavior responds strongly to incentives. There are economic tools that can make a difference to saving rates. Higher interest rates are one, but so are sales taxes that make spending less attractive. Behavioral economists have identified a number of techniques for prompting people to save more—a simple and effective one is making people opt out of rather than opt in to retirement saving plans, or in other words have their contributions deducted automatically from their pay unless they choose not to do so, in contrast to the current convention that people make an active decision to join a saving plan and have deductions made from their paycheck.9