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We have entered an era in which delayed gratification is a moral imperative
Back in the 2010s, and really from the outbreak of the global financial crisis, the world economy found itself in a very strange place. For more than a decade, the main constraint on growth was demand—that is, spending. Generally speaking, one person’s spending is another person’s income, and people create new economic capacity—they build factories which produce consumer goods or open barber shops or what have you—in the expectation that there will be others out in the world who will spend money to buy those goods and services, which will in turn become the businessperson’s income. But it can be the case that there is not as much spending around as we might want or as businesses expected. In that case, business people might not build new factories or open new shops, and so the growth of the economy will slow. And if the spending shortfall is large enough, then factories and shops which had already opened find that they are no longer earning as much income as they used to, and they may begin to operate their businesses at less than full capacity, or even close them; that’s a recession.
The financial crisis caused a recession across much of the world because it was associated with a large drop in spending. Spending fell for a number of reasons, which I won’t get into here, but the upshot was that there was not enough money flowing through the economy to keep all the factories and shops and construction sites operating at full tilt, and the governments and central banks whose job it is to make sure that this kind of shortfall doesn’t happen did not do their jobs very well, and so we got a big recession and a weak recovery.
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Now, as the weak recovery wore on, it also came to seem that the not-enough-spending problem wasn’t just a financial-crisis thing. Instead people began to worry that too-little-spending was a chronic condition (secular stagnation was the phrase Larry Summers used to describe it, resurrecting a concept from the 1930s) which was due to things like the aging of the population (which meant more folks saving for retirement) and rising inequality (which meant more money in the hands of richer people who tend to save a larger share of their income). But what we were generally experiencing was a situation in which people and companies and governments which had lots of purchasing power chose not to deploy very much of that purchasing power, and so some productive capacity did not get used and many people who might otherwise have tried to create more productive capacity in order to earn more money did not.
In this kind of economy, you can perform a certain magic trick where you create new purchasing power, give it to people, and then watch as the use of that purchasing power conjures new output into existence. You can perform this trick because the capacity to produce that output is already there, more or less, just waiting for spending to pick up. There are factories which could be making more stuff, and people who would like to be working more hours, and so on.
In other words, this world is one in which more consumption means more output. See, magic. By consuming more (in aggregate) you can make yourself richer.
Now, over the past year we have been reminded that things are not always like this. We have been reminded that if we keep adding spending to an economy it will boost output, but only up to a point. Beyond that point, things work differently. Then, if you print money and hand it to people and those people go spend some of that money, well, businesspeople will try to create more capacity to absorb that spending, but they will not have much luck. This factory over here may expand in order to produce more goods that it can sell, but it can only do that by outbidding other businesspeople for machinery or workers which are already in use. Resources get moved around, prices go up, but productive capacity does not expand.
In an economy which finds itself in this position, there is a conversation that policy wonks tend to have, which is something like: there is too much spending, so now we need to reduce spending. This is more or less what the Fed has said and what it aims to achieve by raising interest rates. Rates go up, credit conditions grow tighter, people decide not to borrow money to pay for new televisions or new factories, spending growth slows, inflation slows.
But not all spending is the same! There is a big difference between borrowing to buy a television and borrowing to build a factory. Remember, all available productive resources are already in use (more or less). So to take a very stylized example: if there are some computer chips around, those chips can be used to make a television or to make a machine that makes more chips, but not both. But the thing is, if you use the chips to make a television, then next year you face the same situation: a pile of chips which can be used to make a television or a machine that makes chips. If you use the chips to make a machine that makes chips, on the other hand, then next year you have a bigger pile of chips and more choices. You can make both a television and a machine that makes chips, for instance. Or you can make two televisions—or two machines that make chips.
In this environment, more consumption means less output, at least relative to available alternatives. The way to get richer is to consume less today, so that tomorrow you can both produce more and consume more.
Now, if you only have one year to live, then hey, best to consume as much as possible. But if you expect to live more than one year, or even many years or decades, and if you also care about your children and grandchildren, who will themselves live for many decades, then you want to make sure you aren’t consuming too much today, because less consumption today means more consumption tomorrow. There are caveats here, if we’re trying to be true to our economic models, like: investment runs into diminishing returns unless people are also coming up with new ideas and technologies, such that one can get a sustained growth return from continued high levels of investment. But one thing that you can invest in is the production of new ideas: by spending on education and basic research and so on; there is a fair amount of concern out there about the increased difficulty of finding big, transformative new ideas, but as we have not really put our back into the task of supporting investment and innovation for a long time I think we could expect healthy returns from a change in tack for at least a few decades.
So! We have a certain amount of productive capacity, and we would like to make sure there is enough spending to keep all of that productive capacity in use, and we would like for there to be more productive capacity tomorrow than there is today, and we would *not* like for there to be lots more spending than there is productive capacity. Where can we go from here?
So, one observation is that when facing a situation in which there is too much spending, what we would really like to do is: 1) make sure that the spending which is taking place is covering the basic needs of everyone in society, and then 2) make sure that spending over and above that level is being used for investment rather than consumption. Or to turn it around: if there is too much spending and we need to cut back, we would really prefer not to hit spending on basic necessities by poor households, and we would really prefer not to hit investment in new productive capacity. We would like to start by cutting back on frivolous luxury items and then go from there.
People need to eat and to have a roof over their heads. The economy needs more houses and ports and solar arrays and computer chips. If the effort to rein in spending is clumsily broad-brush rather than targeted, then it may result in people being thrown out of work such that they cannot afford basic necessities, and it may result in a halt in investment in new houses and chip-making factories, such that we end up in an undesirable place both today and tomorrow. Unfortunately, it seems like this is what we’re going to get. Rate hikes are not a particularly well-targeted policy tool, and the Fed will end up choking off investment in the months ahead (and perhaps also discouraging some over longer horizons as well) and it will probably also induce some unnecessary unemployment as well.
Could we do better? I certainly think so. Right now, rate hikes by the Fed don’t really translate into higher rates on savings accounts, because banks don’t feel pressure to compete for deposits. That’s too bad; if they did, then middle-class households which can afford to save excess income might choose to do so, voluntarily withdrawing their spending from the economy and leaving more room for other sorts of spending. One way to move in this direction would be to have the Fed provide simple, no-fee bank accounts to every American, paying a rate of interest set by Fed policymakers. Then when Fed rates went up, banks would either pay higher rates to their depositors or watch as those customers moved their money into accounts at the Fed.
Another option would be to adopt a progressive consumption tax. What we really want, after all, is for people who have everything they need to stop buying consumption goods, so that we can instead use available productive capacity to provide for those who don’t have everything they need and to ensure that we can produce more stuff tomorrow. And look, this makes sense, right? If there’s too much spending, then the people who should really be spending less are the ones who already have a shit ton of stuff, no?
Obviously, this is not something that politicians are rushing to implement, because taxes are unpopular and because the relatively well-off are a potent political force. But this is a bullet that we really need to bite, for a few very important reasons.
One is that we are persistently making a particular error of shortsightedness, which leaves us all poorer over the long run. If we choose not to have a thing today, we can have it and also other stuff tomorrow. If we slightly discourage consumption of televisions and big cars today, and use the resources freed up by that action to increase our productive capacity, then tomorrow we can have the television and big car at a lower price or while also having something else. If we reduce consumption as a share of GDP and increase investment, then we experience an immediate decline in consumption. But if that investment leads to faster growth, then it won’t be long before the lower consumption share of a larger GDP amounts to substantially more Good Things for Consumers than would have been obtainable had we kept the higher consumption share and the slower growing economy.
Less consumption today, better medicines tomorrow. Less consumption today, more port capacity tomorrow. Less consumption today, more renewable energy tomorrow. Less consumption today, more chip-making capacity tomorrow. Hey, and then it turns out that we can sustain a 5% rate of growth without inflation rising to levels that induce panic at the Fed.
But there are other reasons for us to get comfortable reducing our consumption, through taxation if need be, like the need to deal with other constraints on economic activity. The higher the concentration of carbon dioxide in the atmosphere, for instance, the higher are global temperatures, and the greater the risk that climate change poses massive and potentially catastrophic human and economic costs. We might imagine, then, that there is some carbon budget, of uncertain size, that we have available to us, such that emissions beyond that budget entail unacceptable costs.
Today, most all of the economic activity in which we engage involves some emission of carbon, and so most all of the economic activity in which we engage uses up some of that available carbon budget. Carbon budget which is used up providing people who already have a lot of stuff with more goods and services cannot be used for other things: like construction of renewable energy capacity, or production of new electric vehicles, or investments in projects which protect cities against sea-level rise, and so on. There is also the awkward fact that much of the world remains relatively poor (and hundreds of millions of people remain very poor indeed). Carbon budget which is used to satisfy the consumption desires of those of us living on pretty good incomes in rich countries is carbon budget which cannot be used as part of the economic development of poor economies.
Here, again, there is an intensely frustrating short-sightedness among those of us fortunate enough to live in the rich world. Money which is invested today in technologies which give us the capacity to produce things without generating emissions is money which expands the room we have to buy and enjoy our toys tomorrow. A little less today, a lot more tomorrow, for everybody.
The carbon constraint is massively important but also a bit abstract for many people. So consider one other dynamic. Sometime this year, global population will reach 8 billion people. All of us need food to eat and energy to provide basic services and a few comforts. We humans have gotten pretty good at producing food and energy, and at turning energy into useful work and GDP. But a combination of growth in output and population, and of constraints on supply associated with war, extreme weather and other factors, has left the world with relatively little supply cushion with respect to a number of critically important resources.
Because food and energy are in scarce supply, the productive capacity of many economies is not growing as fast as would otherwise be the case, and central banks are accordingly taking action to reduce the growth of spending. Because food and energy are in scarce supply, some economies are discovering that they can no longer afford to import both the food and energy that they need and all the other things their societies would like to have; some are discovering this as part of a process of, basically, running out of money, which stands to do serious human and economic harm. And because food and energy are in scarce supply, some people in some parts of the world simply won’t get enough of one or the other or both: and so poverty will go up and people will go hungry and some will die.
Grains and hydrocarbons which are used to satisfy frivolous consumption by rich people cannot be used to provide critical services and calories to people on the edge of subsistence. Now, we do of course have some capacity to increase the supply of grains and hydrocarbons (or renewable-energy substitutes) and to improve the efficiency of our consumption. But resources which are used to satisfy frivolous consumption by rich people cannot be used to increase our capacity to produce food and energy or to improve the efficiency of our consumption. Do we need to eat as much beef as we do, now, in these circumstances? We could tax it, eat a bit less and use the tax proceeds—which is to say the resources freed up by the reduced beef consumption associated with the tax—to do something else that would make the world economy richer and more resilient tomorrow, or, hey, to feed the hungry.
But these are the trade-offs we face. Our consumption is costly. It didn’t feel that way a decade ago, it is true. But we need to make sure that we understand why that was the case. It wasn’t because consumption is magic. It was because we were making big policy mistakes year in and year out, such that any magic trick which boosted consumption, and thus made use of idle capacity, represented a small improvement over bad policy. What we should have understood is that productive capacity is extremely valuable. And so allowing some of it to sit idle when it might have instead been used to ease suffering, or create more room in the carbon budget, or build more productive capacity was an unconscionable error.
But engaging in frivolous consumption in the face of clearly binding constraints on productive capacity with life-or-death stakes is also unconscionable! And foolhardy. So let’s all get comfortable with the idea: less today for more tomorrow. If we commit to the mantra ardently enough, then one day we will find that people aren’t going hungry, and we don’t need to worry about rolling blackouts, and there is ample room in the carbon budget for all our toys—and maybe even that the magic money trick works on a sustained basis. Doesn’t eating our shabby little cake today seem like a sad alternative to all of that?
We have to be grownups now. People a little older than us didn’t, lucky them. They felt comfortable cutting their own taxes and reducing investment and living the good life. We don’t get to do that. We shouldn’t want to do that. We shouldn’t give ourselves the moral permission to do that. We can have more: you, me, everyone. But there is only one way to get there, and it is unfortunately the old-fashioned way: make the sacrifice today for the reward tomorrow.
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