EconTalk Episode with Steve Fazzari
Steve Fazzari, of Washington University in St. Louis, talks with EconTalk host Russ Roberts about Keynesian economics.
talks about the paradox of thrift, makes the case for a government stimulus plan, and weighs the empirical evidence for a Keynesian worldview.
"Household Debt in the Consumer Age: Source of Growth Risk of Collapse", by Steve Fazzari
(co-authored with Barry Cynamon).
"A Penny Saved May Not be a Penny Earned: Thinking Hard About Saving and the Creation of Wealth", by Steve Fazzari
CATEGORIES: Business Cycles, Recessions, and the Great Depression (57) , Steve Fazzari
: Follow Russ Roberts @EconTalker
If, according to Dr. Fazzari
& Keynes, overall savings & income decrease, because less money is circulating throughout the economy, so be it.
It was an unsustainable boom to begin with (fueled in large part by federal government policy, but that's a different conversation).
How to direct resources to their most productive uses is critical.
The historical evidence is clear that free markets are far superior to central governmental planning & spending in achieving this.
The problem I have with Dr. Fazzari
& Keynes is there's no supporting evidence to their arguments.
I thought the podcast was great, and Prof. Fazzari's
illustration of the paradox of thrift was very clarifying.
At the same time, I also found myself shouting "No!
periodically while listening to it.
When explaining the paradox of thrift, for example, Prof. Fazzari
says explicitly that you have to hold total income constant.
conclusion is that, in the case he
provides, total income will fall.
The offsetting behavior by the business owner is the puzzle presented by Fazzari
in the podcast.
The reason could be as described by Fazzari
, based on one of Keynes's original concepts that any attempt to save once equilibrium is breached is instantly offset by the actions of other entities.
The more I think about Prof. Fazzari's
example (of the paradox of thrift), the less persuasive it becomes.
is right to note that when a family decides to divert spending on eating at a restaurant to savings, then ceteris paribus the restaurant owner will face a corresponding reduction in income.
So the restaurant owner will face the choice of reducing consumption or reducing savings.
, however, just assumes that he
will respond by reducing savings, and indeed this assumption is pivotal to his
conclusion that overall savings won't increase.
So, basically, Prof. Fazzari's
example assumes exactly what it sets out to prove, which is a nice rhetorical trick, but logically speaking not so hot.
I think Prof. Fazzari's
example of the restaurant seems pretty reasonable.
basically explaining the identity that includes the velocity of money and GDP, while pointing out that a payment for food (or anything) merely shifts the money from one bank account to another, which will be available for investment regardless of whose account it is in?
I personally found Prof. Fazzari's
specific explication of the Paradox of Thrift solid and enlightening.
As a software engineer used to systems thinking, it made a lot of sense.
Lee, Josiah - The reason I expect Prof. Fazzari
is suggesting that the restaurant owner is going to reduce saving rather than reduce consumption is because it's one of the things he's
One of the things Prof. Fazzari
explained is that saving reduces income in the system as a whole.
One question I would have for Prof. Fazzari
(and folks like Barry Kelly) is where did the restaurant come from?
If total income is to remain constant (Prof. Fazzari's assumption) and the restaurant owner has lost income, then there must be one or more people in the economy who's income has increased by the exact amount that the restaurant owner's has decreased, and they should be able to "make up the gap" in spending.
said, "...the source of why the US economy has done pretty well over the last 20 to 25 years - I might think of it as an autonomous drive to more demand."
I was waiting for Fazzari
to say something like - "in normal times, your extra savings would be lent out to someone else, but during a recession..."
What surprises me the most is that Fazzari
seems to be arguing that there is no benefit to savings.
What drove me crazy about Prof. Fazzari's
analysis was the way he
conflated savings and income, as if they were the same thing.
was incorrect in stating that the restaurant owner would decrease his
savings to keep production at normal level.
In reality, the restaurant owner would not decrease his
own savings but rather decrease his
production of food (due to less demand now).
income would fall.
I don't think Fazzari
adequately responded to the question of why, if personal savings creates no net increase in loanable funds from the bank, it should result in any net destruction of such funds either.
assumes the money I spend at the restaurant would be saved by the restaurant owner.
But isn't the problem that everyone (or most people) in the economy are living beyond their means, borrowing and spending rather than saving?
responds to the perennial reductio ad absurdum for Keynesian theory, that the government should hire people to dig holes and then fill them back up again, by saying basically "of course we don't recommend anything that silly".
demonstrates, some of these guys are extremely bright, but seem to have a glitch in their thinking which can't process this type of info.
I am sure they probably have other thinking skills which we don't have that are very useful, but trying to reason with them on macroeconomics is like trying to turn an extravert into an introvert or a right handed person into a left hander - they don't get it, and in fact they won't ever get it.
Posted January 13, 2009 6:29 PM
Mark K writes:
I thought Prof. Fazzari
did an exceptional job of defending his
assumes incremental profit margins of 100% he
also assumes in incremental ROI of infinity!
I do not think Fazzari
really answered this?
In summary, by by-passing the banks as intermediaries, we can see the difference between the classical and Keynesian model (as put forth by Fazzari).
There has to be another piece to the story to explain that breakdown, and that is the piece that Fazzari
didn't get into.
But it turns out that bank debt is a very secure asset and therefor people are willing to take bank debt as payment as if though it really was dullish green slips of paper with dead presidents on; but they're not willing to take an IOU from your friend Steve(who owes you $5 for a beer) in lieu of fed money.
I think that Mr. Fazzari
has some valid points, though he
may not have made them very clearly.
I suppose that in essence, he
argues for a "smoothing" of the natural cycles of business, and that parachute drops, or hole digging/filling projects will prevent markets from overshooting the bottom on the way down.
One thing that I would like answered by Steve
I found it particularly warming to hear at the end Mr Fazzari
and Russ being quite honest about our limited understanding of what really seems to be going on.
No matter how many times Fazzari
asserted the Paradox of Thrift Roberts didn't seem to grasp that Fazzari really was asserting that when the consumer in the restaurant example substitutes unpaid labor for paid and as a result leaves more money in his
checking account (the main effect -- he
is also substituting his
food purchases for the restaurant's, his
trips to the grocery store for the restaurant's deliveries, fueling his
stove for the restaurant's gas purchases, etc.) that there was no net increase in savings.
Which is a shame, because Fazzari
is speaking nonsense.
I noticed someone further up this thread who caught the basic point that Fazzari
was assuming his
conclusion by holding the restaurant owner's expenditures constant.
I didn't find Prof. Fazzari's
argument convincing at all.
The difference between Fazzari
and Xeno is that Xeno knew that the racer would pass the tortoise, and that there was therefor something wrong with the argument he
really seems to think that saving doesn't increase savings.
was clear and appealingly modest, but his
argument is frustratingly circular: it implies that aggregate saving and consumption has to be static.
I found two holes (from a micro perspective) in Prof. Fazzari's
restaurant example that you failed to bring up.
Perhaps I'm missing s