Do You Believe?

Bluematter says rational agents shouldn't be struggling right now:

If you believe in Ricardian equivalence, you don't believe in recessions: The same rational, non-credit constrained individual that will save a tax rebate in anticipation of higher taxes in the future is the same rational, non-credit constrained individual that will save something extra in the good times so he can maintain his consumption level unchanged during recessions - as much a certainty in life as death and taxes.

If you believe that fiscal stimuli are pointless, then you don't believe in recessions as we know them.

Comments

[X Man]

Funny he should bring that up, because I just spoke with a rational, non-credit constrained individual who tried to get me to buy his Chevy dealership from him. Bwa-fat chance.

[Barkley Rosser]

Did not Ricardian Equivalence go out the window back in the days of the first Reagan tax cut, which was followed by a decline in the savings rate?

[reason]

Very good point. It is time PARTIAL analysis got its comeuppance and saw itself in the mirror. (Of course the problem with Ricardian equivalence was always that the people doing the saving and the people paying the future tax are often not the same people).

[OhNoNotAgain]

Well, I would consider myself in the rational camp, but that doesn't mean that I can't understand why someone else would act differently and still think of themselves as rational also. Rationality only has context in the face of perfect information. In the face of imperfect, and often intentionally misleading information, people act in a way that they think is perfectly rational, yet is still ultimately irrational.

This is why wise economic leadership is so important in our country. Wise leadership is what helps to keep our best interests in front of us as national goals. We have seen our personal savings rate decline for years now, yet you hear nary a peep from anyone. That is a failure of leadership from the people that are supposed to worry about these macro issues. Instead, we're told to go shopping, take out more credit, and "invest" our retirement in stocks.

The risk of the entire economy has been shifted from institutions to individuals in a matter of ~30 years, with absolutely no regard for the ability of these same individuals to understand, let alone manage, that risk. The result is crushing social burdens as we try to mop up the fallout post facto. We need national defined benefit pension plans and other mandatory savings/retirement vehicles if we are ever going to get out from under these burdens.

[robertdfeinman]

It's all a matter of "faith".

If you believe in the afterlife then you should lead a modest, prudent, lifestyle to ensure that you get into heaven.

If you don't believe in an afterlife then you should spend to the hilt and enjoy it while you can.

Surprisingly the truly religious (or at least those who claim to be so) are among the most profligate of spenders (and borrowers). Cognitive dissonance or just lying about their true beliefs?

On the other hand I still have a problem with the concept of "savings". At an individual level savings means deferred spending. The usual reason being given that the reward will be better in the future and this will make up for the delayed gratification. (I can get a 26" TV now or a 52" in six months.) It may also mean that people are explicitly creating a cushion for lean times, but this seems to be happening less than in the era where people still remembered the great depression.

At the macro level "savings" makes no sense to me. If I save, all it means is that I put the money elsewhere (a bank, say) where someone else makes the decision as to how it should be spent. Unless the money is placed under a mattress it should make little difference whether consumers "save" or "spend". What does make a difference is whether they borrow or live within their means.

Looked at this way the crash is a result of the limit of borrowing being reached. That housing was just the first fracture point was just a detail.

Apparently the majority feel that hedonism is the preferred lifestyle, which answers the theological issue I posed pretty decisively.

[ndk]

If you believe that fiscal stimuli are pointless, then you don't believe in recessions as we know them.

Because, of course, the only thing that could possibly be wrong with fiscal stimulus is Ricardian equivalence. You'll notice your informed commentators have wisely steered clear of that whole can of worms and still voiced plenty of reasonable concerns.

[kthomas]

I've got a great bridge for sale. Goes absolutely nowhere.

[Patricia Shannon]

OhNoNotAgain, very true

[john c. halasz]

So what exactly is the difference between the "income smoothing hypothesis" and debt-fueled consumption? Long ago, an alternate explanation of consumption behavior was proposed, even as the "income smoothing hypothesis" was gaining academic sway: consumer emulation, basically, "keeping up with the Joneses". And there's probably better empirical evidence for the latter. Doesn't "income smoothing" not only suppose a fictitious level of fore-sight and assurance with respect to future states-of-affairs, but also either a sufficient level of household wealth or a deleterious degree of credit availability , (with respect to matching productive investment to available income)? And is it a coincidence that the income smoothing assumption gained currency precisely with the ballooning ascendancy of the financial sector?

[Bruce Wilder]

reason: "Of course the problem with Ricardian equivalence was always that the people doing the saving and the people paying the future tax are often not the same people."

Of course, that's one way to look at it.

A bond is just a committment to a rule governing future tax and transfer of claims. It has value in the present, precisely because we expect both a future flow of claims in tax and a future flow of claims in interest payment. If our expectations for those two flows exactly match, and they cancel each other out, why does the bond have any value at all? There's a certain zen-like quality in contemplating the maya of money. ;-)

There's no barter with the future, or the past, but we don't live in a barter economy, do we? A circulating flow of claims drives the allocation of resources to production and the distribution of product to consumption and investment, in the present, and only in the present, because only the present moment ever exists. The claims are neither created nor destroyed in the series of exchanges that constitute the flow driving economic activity. The claims are created and destroyed only in our dreams.

For ndk, I would not suggest that a fiscal stimulus is called for in every possible state of the present moment. I will only say, the spice must flow.

A disturbance in expectations

says...

I believe in gazing at bluematter's navel while contemplating the number of unemployed that can dance on the fine point of his pinhead

[OhNoNotAgain]

"You'll notice your informed commentators have wisely steered clear of that whole can of worms and still voiced plenty of reasonable concerns."

I kind of skipped over that because it seems a little silly to discuss a stimulus in such a fashion. It would seem to me that "rationality" as an economic concept is severely flawed, so that any argument that derives from it is bound to be off by a country mile. John C. Halasz is spot-on. Our consumption behavior isn't rational in the least, especially when you factor in the effects of non-stop psychological manipulation via the pervasive marketing that we are exposed to.

[Lafayette]

ONNA: Rationality only has context in the face of perfect information

Of course not. We live in a world of "asymmetric" or "incomplete information". Yet, we are rational animals.

The mistake is in thinking that man is a rational animal at all times, under all conditions. Anyone familiar with merchandising will now the myriad ways of manipulating consumption decisions that have little bearing in rationality - but much in highly subjective reasoning.

Rational means only that one is able to think sensibly or logically, not necessarily that one is perfectly objective. Which is quite probably impossible.

What distinguishes the human animal from others is the ability to think better than the others. The rational economic man has been blown way out of proportion to reality, because it suits academic needs to understand human behaviour.

In fact, within a frenzy, the most logical of us may be swept away in the rush to obtain something we THINK we must have because everyone else seems to want it. We mimic the behaviour of others. Fashion succumbs to the same principle. Why should wearing a particular style of clothes be determined by any profoundly rationalized behaviour? Yet, some live their lives in such a manner. And, birds of a feather do flock together since mutually reinforcing one another’s behaviour is also an important social factor for many of us. (Aka, keeping up with the Joneses.)

Is it rational to behave in such a manner? By whose definition of rational? And, yet it is a typically observable behaviour. So, there is evidently a subtle difference between rational behaviour, where calculation or judgment enters, or normative behaviour where mimicking/copying others takes place. There is some comfort in following a social trend.

Religions subscribe to the same principles. We have, most of us, the religion of our parents. What rationality is involved in that behaviour? Should we not be considering ALL religions before making a perfectly informed "rational choice"? Yet, we do not. Does that behaviour make us irrational beings? Were it so, we are therefore mostly irrational beings.

We must be careful of the word "rational". It is often highly subjective. It is a bit high minded and a hand-me-down from a period in history when philosophers preferred to think that the supposed rationality, or the ability to reason, that distinguishes the human animal from others was somehow a gift of God.

[Patricia Shannon]

Being social creatures of few instincts, it is necessary for the survival of our species that we usually automatically follow the norm (maybe one of our few instincts?). Eg., those who didn't follow their cultures diet proscriptions might die from poison fruit or muxhrooms.

[Lafayette]

PS: Being social creatures of few instincts, it is necessary for the survival of our species that we usually automatically follow the norm (maybe one of our few instincts?

Not being an anthropologist, I don't really know. But, I would suspect that the human animal huddled into herds/tribes/collectives for mutual protection.

Homo sapiens has been around for, at least 50,000 years, so we've had time to hone that instinct and officialize it in our civilizations. We have also come to note that we benefit from collectivity, because it creates larger harmonized markets that promote barter/exchange of goods/ervices ... and the division of labor enhanced productivity. So, it is of a great benefit.

Where it goes wrong, I suggest, is thinking that a comparative minority have always exaggeratedly benefited at the cost of another minority. We came out of the jungle to create societies for the reasons mentioned. We must try to keep them civilized. It is far from being a question of survival of the fittest. And yet, often, such as at present, one is brought to wonder if the fittest have not only survived, but survived very well indeed.

But, are they the fittest. Or, just the luckiest? And, therefore, should luck determine to such an extent both collective and individual destinies.

Methinks not.