Allan H. Meltzer writes:
Quantitative Quicksand: The US economy has not responded to the Fed’s monetary expansion, because America’s biggest problems are not liquidity problems…. One major problem [is] insufficient investment…
And indeed it is: investment in equipment and software has recovered quite nicely from its recession-trough lows--and in fact is very high given the amount of slack capacity in the American economy today:
It is investment in residential construction that is lagging--even though we have a cumulative shortfall relative to trend of 10% of a year's GDP, that is to say, two full years of investment in residential construction. Because mortgage finance is broken and the U.S. Treasury as housing regulator has failed in its job of fixing it, millions of people are now living in their sisters' basements rather than owning or renting their own homes or apartments.
So you would expect Meltzer--having looked at these numbers--to continue with a discussion of how insufficient investment in residential construction is rooted in the collapse of the mortgage housing-finance credit channel, right?
Insufficient investment… is rooted in President Barack Obama’s effort to increase the tax paid by those whose annual incomes exceed $250,000 and, more recently, in his proposal to cap retirement entitlements. While such proposals have been met with opposition, Obama cannot be expected to sign a deficit-reduction bill that does not include more revenue. As long as that revenue’s sources, and the future effects of new regulations, remain uncertain, those whom the policies would most harm--the country’s largest savers--are unlikely to invest…
So, Meltzer says, investment is held back not by an unwillingness of banks to make mortgage loans but by the unwillingness of America's rich savers to commit their funds to long-germ real assets. That means that those few of the country's savers who are willing to do so are scarce and have a strong bargaining position--and are thus able to lend at very attractive terms for them and receive high interest rates. Right? Wrong!
Demand for savings to use to purchase or build capital is very low relative to supply. In normal times savers can get 2% per year in real terms on investments as safe as U.S. Treasury bonds. Today they can get zero--and until last month they could only get -0.7% per year. There is not a savings shortage, but instead a savings glut relative to demand for funds.
Hasn't Allan Meltzer looked at this graph and thought about what it meant for his story about investment in America being low because of a shortage of savings? Nope.
I mean, why bother? If you are not going to look at both quantities and prices to see whether the story you are spinning makes even first-order sense, why bother to try to be an economist at all?