As savings rise, consumption falls.
As current consumption falls implied future consumption rises. In other words, a shift in the schedule of intertemporal resource allocation. Absent of a monetary authority, an increase in savings will change the prices of consumption goods relative to the prices of the means of production. As prices adjust, the optimal return on the additional savings is achieved by increasing the depth and breadth of intermediate production goods, which, in turn, shifts the schedule of output (of consumption goods) farther into the future and, thereby, matching the new intertemporal consumption pattern.
Since the rich save more money than the poor, the concentration of wealth in fewer hands increases savings and decreases consumption. As demand drops, and economic growth fails to keep pace with growth in the labor force, unemployment rises.
Nope (see above). This is simply a recasting of the old, and persistent, underconsumption "general glut" argument in order to provide a rational basis for class envy. Further, assuming a leptokurtosis distribution of wealth, more wealth will be concentrated into the hands of the rich as the economy grows, but this doesn't imply that consumption drops, since even those at the bottom of the distribution enjoy more wealth. It does mean that the rate of savings should grow faster than the rate of consumption resulting in a continual increase in the depth and breadth of production and thus an increase in the rate of demand for labor (setting aside any shifts to more capital intensive production methods).
Classically, this is a self-correcting process; labor costs eventually adjust, excesses are flushed out of the system, and growth begins anew.
The author, apparently, doesn't posses a conception of heterogeneous capital, nor the time element of production plans. This is not surprising since nearly all academic treatments of macroeconomics given at the undergraduate level (he claims an MBA) abstract away both time and heterogeneous capital. However, by doing so, the intertemporal coordination of savings/investment with consumption can only come about by accident, and thus represents a potential market failure (see Keynes' "paradox of thrift"), which, not surprisingly, motivates government intervention. In any case, with such abstractions in place is it perfectly understandable how the author can reach the perverse conclusion that savings leads to excesses that must be "flushed from the system."
A recession is a normal, necessary part of the business cycle
Well, I guess it wouldn't be much of a cycle without fluctuations - but is a recession really necessary?
But when wealth becomes concentrated, the number of less affluent people increases, as well as their borrowing needs.
if one were to become less affluent, in absolute terms, borrowing decreases. Concentration of wealth in a growing economy is not a sufficient condition to conclude that other indivuals wealth is decreasing - in absolute terms.
These less affluent people, who now make up the majority, have fewer assets and are thus less credit worthy.
Since "less affluent" is a relative term, how can he assert they "now make up the majority".
Even in such an environment, banks cannot afford to be choosy -- they must make loans in order to stay "competitive" with their peers and simply to stay in business.
He hasn't yet shown that "such an environment" is produced by an increase in wealth concentration in a growing economy. However, let's set that premise aside for the moment and consider that a bank is a business. It faces the same incentives and constraints as any other business and therefore will produce financial services up to the limit of where marginal revenue equals marginal cost. Therefore, they will makes loans when the expected revenue from those loans exceed their cost - with the default rate, obviously, being part of the cost.
Thus, as the concentration of wealth rises, the number of unhealthy banks with shaky loans also rises in a dangerous spiral, increasing the possibility of systemic failure.
And the Keynesian conclusion - "the market is inherently unstable." The systematic failure comes not from the market but from the moral hazard produced by institutions designed to prevent bank runs, mainly FDIC and the now defunct FSLIC, and the regulatory policies such as the "too big too fail" policy. These protect the bank from the cost of failed loans and thereby reward risky behavior.
The author cannot reach the conclusion that the systematic failure arises from government action because he started from a premise that a financial system free from regulatory control is inherently unstable, and therefore requires government intervention. |
