Sunday, August 24, 2008

Tyler Cowen as Mr. Ray of Sunshine

Tyler Cowen is not being very cheery:
...Asset prices haven’t been rising much lately, so many people will need more savings for their retirement or for possible emergencies.

The need to save more sharpens a number of interrelated secondary problems. First, America is aging. More people than ever are entering the years when they stop saving and start spending their nest eggs. That means the transition to higher-than-expected savings may be drawn out and painful.

The second problem is that the American economy is enduring a credit crisis, with many banks trying to raise more capital and make fewer loans. Savings are good for the economy when they lead to investment, but there is no guarantee that financial institutions will be allocating capital efficiently.

The third problem is that lower consumer spending will require the American economy to make some shifts. That may mean fewer Starbucks and fewer new homes but more tractor production for export to foreign markets. In the long run, shifting some consumption to investment is probably beneficial to the economy; in the short run it means job losses and costly readjustments.

In addition, there are still excess homes on the market, and housing prices need to fall further. Of course, such price declines can make banks less solvent and thus worsen the credit crisis. And politicians would like to moderate this fall in prices, again prolonging the adjustment process.

On top of all that is the largely separate matter of energy prices. High prices will encourage conservation and cleaner energy alternatives, but voters want low gasoline prices and winter heating bills. Politicians see lower energy prices as a way to help the economy in the short run — and as a way to win votes.

The evolution of energy prices may not follow any kind of desirable logic. There’s also the danger that the Fed will view high energy prices as a sign of permanent inflation and tighten money supply growth prematurely.
Hard to find much wrong with this assessment. And this is as close as he can come to an optimistic, snappy sum-up:
Have you ever tried to undo a bunch of tangled wires or cords? If you don’t pull on the right wires in the right order, the mess becomes worse. If you pull too hard, the whole thing can break. But if your first pulls are good ones, the untangling becomes easier with each move.

That’s like our economy’s situation today. If we expect too much too quickly, we’ll make matters worse. But there is a way out of the mess, and it lies in our hands.

Be careful, and start pulling.
The perfect time to enact a bunch of populist economic sops, eh?

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