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Posted on Sep 27, 2013 in How to simplify, Inspiration | 10 comments

Can Consuming More Save the Economy?

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Recently, Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, spoke in Michigan about the capacity of the Federal Reserve Bank to improve unemployment.  In this speech, he seems to be reassuring us that monetary policy can improve employment opportunities by increasing our confidence in monetary policy, which will increase the goods and services consumed and increase the number of people employed.

To begin, he argues that while the unemployment rate has declined, a better picture of the number of people are out of work is the employment-to-population ratio.

Here, I’ve plotted the fraction of the population aged 25 to 54 who have a job. This ratio has improved somewhat more from its low point, but also remains lower than at any time between 1986 and 2007.

He proposes that unemployment can be viewed as the persistence of excess labor capacity, that this is a waste, and that changing the demand for goods can be achieved without increasing inflation.

These low levels of inflation tell us that monetary policy can be useful in increasing the rate of improvement in the labor market. Here’s what I mean. At a basic level, monetary stimulus increases the demand for goods among households and firms. This higher demand for goods tends to push upward on both prices and employment. Hence, the downside with using monetary policy to stimulate employment is that, when employment is near its maximum level, further stimulus can lead to unduly high inflation. But the data show …low levels of inflation show that the FOMC has a lot of room to provide much needed stimulus to the labor market.

Here’s how this works:

If households expect their incomes to be low in the future, they will save more and spend less today. If businesses expect low future demand for their products, they will invest less today and hire fewer people today.

This has me thinking. If we tell people that consuming less makes their life better (and I do), are we hurting the economy?

What do you think?

 

Photo credit: yomanimus
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10 Comments

  1. If we insist on having so many people, I cannot see a solution to this problem. We can only have so many people slinging burgers and plugging numbers into computers. I’d like to see people putting more on the table than money for goods. Great article and fabulous questions!!! Have a silly one!!!

    • I have to admit, I didn’t feel very silly when I read this!
      I can’t imagine that this is a sustainable answer. People are not stockpiling piles cash in the bank or under the bed. When everyone went into debt to buy everything in sight, things were not all that great either. It’s hard to accept that we have to choose either our individual happiness or reducing the suffering of others. There has to be a better way.
      I hope we can all spend the weekend in lighter pursuits!

      • Thanks so much for your thoughtful reply! We shall spend the weekend in lighter pursuits, but it was a great question to ponder and continue to ponder. If we are made to choose our individual happiness or reducing the suffering of others, humanity will be worth very little. No art, no beauty, just surviving. Sounds nasty to me. You make excellent points! Thank you, again.

        • Exactly! I’m sure we can do better.

  2. While this may be true, I can’t see running out to buy more things. On a personal level, it makes life worth living when I am able to create and have fun each day rather than work myself to death to buy more things.

    I do think you pose a great question, and I’m so not sure how “we” (as in the country, the world) should proceed. It seems that for far too long it’s been Buy Buy Buy and, when people spend what they don’t have, bankruptcies, addictions, and divorces result. They can’t be doing our economy much good either.

    Great food for thought on this Fabulous Friday! Thank you!

    • Thanks for the feedback! I agree that there has to be a better answer. Maybe if the economists are a bit more creative, they can come up with a more sustainable plan that trying to convince us to buy new cars.

    • Thanks for the links. It is not a simple problem, and one that deserves some thought!

  3. I think it depends on what our goals are for the economy. If we’re all to live simpler lives, do we even NEED an economy that’s in constant growth mode?

    I don’t claim to have any real understanding of economics, but it seems like a corporate model (by which I mean large corporations not just a small business that happens to be incorporated) that expects constant growth vs the small business model of always making enough money to support the families of the owners and employees.

    Not even considering class issues and who’s getting richer or poorer: Is, for example, a middle-middle class family today better off than one in the 1950s?

    • Good points. It seems that there are a lot of people out of work without access to jobs. Many have started their own businesses, and simplifying is helpful. Maybe this should be the start of a grassroots change?

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