<http://schema.org/articleBody>
"The Obama administration\u2019s stimulus package may have boosted spending in the short-term, but savings have a more lasting impact on the broader economy.\n \n\n  \n    \n      \n    \n  \nShould we put more into the ATM or take more out?\n \nDespite the struggling economy, President Obama keeps arguing that his stimulus package is producing GDP growth that\u2019s far better than the disaster that would have ensued without the $862 billion in emergency spending. The reason, he and his advisors maintain, is that what really counts is spending &amp;#8212; the more the better, at least for now.\nThe sole thrust of the administration\u2019s policy is to boost consumer and government spending by borrowing heavily, and then recycling those dollars to people who are most likely to spend them on restaurant meals, PCs or toys. At the same time, it\u2019s vastly lifting federal outlays on everything from auto fleets to subsidies for solar panels.\nAll that \u201Cnew\u201D spending supposedly saved the economy. As Obama stated in December, \u201CWhen you lose a trillion dollars in demand, you need to have a big enough recovery package to make up for the lost demand.\u201D In August, Treasury Secretary Timothy Geithner used the \u201Cconsumption is king\u201D rationale to champion keeping the Bush tax cuts for middle-income Americans who typically spend the cash, and ending them for high-earners, who save most of it.\nBut the administration\u2019s policy has a fundamental flaw. By basic economic math, it\u2019s impossible to raise GDP by borrowing from one group of people who would otherwise save that money, and transferring it to another group of people, and to the government, to spend. Savings, in the short term, have precisely the same impact on national income as spending.\nThe reason couldn\u2019t be simpler: All savings are spent. Let\u2019s look at the big picture. GDP measures all spending on all the goods and services that America produces. Savings translate, dollar for dollar, into a major component of that total spending: investment. All the money that the administration successfully moves from savings to consumption simply channels one type of spending to another, in precisely offsetting amounts. It\u2019s like filling a swimming pool from one end, and draining it from the other end. The level doesn\u2019t change. Nor does GDP change when the government drains investment to lift consumption.\nWe\u2019ve all heard the argument that since consumer spending accounts for around two-thirds of GDP, a pro-growth policy must overwhelmingly concentrate on raising that number. But remember, GDP is composed of three other components, including government outlays, the surplus of exports over imports, and private investment. It\u2019s indeed possible to raise consumer spending by a significant amount, say from 65% to 75% of GDP, by reducing both private investment and net exports\u2013\u2013in fact, that\u2019s what\u2019s happening right now. That\u2019s real legacy of Obamanomics.\nWhat savings will finance\nOver long periods, it\u2019s savings\u2013\u2013not consumer spending\u2013\u2013that finance the investments in mainframes, robots and other capital equipment that enhance productivity and drive economic growth. \u201CPresident Obama keeps saying that only consumption counts,\u201D says Allan Meltzer, the distinguished economist at Carnegie Mellon. \u201CIt\u2019s foolish. Of course the money that people save doesn\u2019t go under the mattress. It goes to individuals to buy a house, or to businesses to build a plant.\u201D\nLet\u2019s examine how savings translate into investments, and hence into a crucial source of spending\u2013\u2013for the future, the most crucial. When people save, they either purchase stocks or bonds, or they deposit the cash in the banking system. When they buy newly-issued securities, those savers provide companies with the cash to purchase equipment, or buy factories and call centers via acquisitions. When they buy CDs or deposit money in savings accounts, the bank typically lends that money either to corporate customers that spend it to expand, or to the government by purchasing treasuries\u2013\u2013and once again, the funds are quickly spent.\nIndeed, the very purpose of the banking system is to guide savings into new spending. \u201CIf someone spends $20,000 on a new car, the money goes right into GDP,\u201D says John Cochrane of the Booth School of Business at the University of Chicago. \u201CIf the same person puts it in the bank, it\u2019s loaned to a company that buys a forklift. The savings go straight to investment spending, and lift GDP by the same amount.\u201D\nWhat if the government borrows most of the money from foreign investors, as America does today? Unfortunately, luring cash in from China and Japan doesn\u2019t change the economics. To buy our Treasuries, foreign investors must first sell us far more of their products than we sell them, forcing the U.S. to maintain a trade deficit year after year. That gap between exports and imports lowers GDP by precisely the same amount that the money they loan us raises GDP. The result, as with sapping savings to raise consumer spending, is a wash.\n\nIn one theoretical case, government borrowing could actually raise total GDP. It\u2019s worth mentioning because this scenario was essential to the theories of John Maynard Keynes, whose prescriptions are extremely influential in the Obama administration. If lots of cash sits on the sidelines, outside the banking system, then the government can add to national income by enticing the people hoarding it to buy Treasuries. Indeed, when Keynes formulated his theories in the Great Depression, consumers mistrusted banks, and kept loads of cash in safes and safety deposit boxes. His solution was to get that idle money moving again.\nCash balances, or accounting entries?\nNow, it\u2019s a different world. Only tiny amounts of cash generated from selling cars, say, or collecting interest, sits idle. While households have virtually no funds outside the banking system, the banks themselves are holding lots of idle money, or rather, potential money. Those funds have nothing to do with what constitutes GDP, the production of goods and services. They are an accounting entry generated by the Federal Reserve to increase the money supply. Banks keep that money on deposit with the Fed, and only draw it down\u2013\u2013in other words, translate it into real money\u2013\u2013when demand for loans increases.\nRight now, demand for credit is so weak that a gigantic $1 trillion in excess reserves are now on deposit at the Fed. \u201CThe Fed is simply giving the system the oil it needs to run smoothly,\u201D says J.D. Foster of the conservative Heritage Foundation and a former George W. Bush budget official. \u201CThat money doesn\u2019t provide any horsepower to the economy.\u201D As Foster points out, those reserves are so oversized that while they\u2019re unlikely to generate more growth, they can produce high levels of inflation.\nSo what is the real result of Obama\u2019s \u201Cstimulus?\u201D The plan has surely shifted money from savings to consumption, although the amounts are impossible to determine. For example, the Making Work Pay program last year gave $800 in cash to middle-class families. It\u2019s probable that they spent more of that money than the folks who bought the bonds, who typically have higher incomes, would have spent. The grants to the states to maintain government jobs made those workers feel more comfortable about their futures, and doubtless gave them the money and confidence to spend more of their incomes. The government also spent tens of billions directly on goods and services.\nSo what would have happened if we\u2019d had no stimulus at all? By economic law, all of the money that was borrowed and redirected to consumption would have gone somewhere else. Two other components of GDP would have to be larger to offset the almost $900 billion in spending and borrowing. First, private investment would be higher, because of the bigger pool of savings, a great sign for the future. \u201CIt\u2019s big increases in private investment that always drive a recovery,\u201D says Cochrane.\nSecond, the U.S. wouldn\u2019t have to borrow nearly as much from abroad. As a result, the dollar would be lower versus other currencies, reflecting its true value. Hence, imports would be more expensive, and our exports far more competitive on the world markets. The rise in exports would help offset the hit to GDP caused by lower consumer spending. Bigger investment and exports on a tear? That\u2019s certainly a good alternative to the results of the stimulus.\nTo be fair, GDP might not be any stronger than it is right now, and it certainly wouldn\u2019t be any worse, either. And our economic future would look at lot brighter.\n\n\nSee also: \nOECD calls recession &amp;#8216;unlikely&amp;#8217;\nWhy Obama&amp;#8217;s plan won&amp;#8217;t buy votes\n8 pro-biz Dems facing tough races"^^<http://www.w3.org/2001/XMLSchema#string>
<http://fortune.com/2010/09/09/the-naked-stimulus-why-savings-stimulate-more-than-spending/?section=magazines_fortune>