Aftershock: The Next Economy and America's Future Read Online Free PDF Page B

Keynes’s answer was also to spread the benefits of economic growth. Keynes recognized that growth depends on the incentives of the rich to save and invest. But he noted that until an economy reaches full employment, additional savings don’t help; in fact, they cause harm by reducing the demand for goods and services. The central problem isn’t too little savings; it’s too little demand for all the goods and services an economy can produce. This logic led Keynes to conclude that “measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favorable to the growth of capital.”
    Keynes thereby offered a theoretical explanation and a practical justification for doing what Marriner Eccles thought government should do under the conditions Eccles witnessed: maintain aggregate demand so that the productive capacity of an economy doesn’t outrun the ability of ordinary people to buy, which would give businesses less incentive to invest. Equally important, enforce a basic bargain giving workers a proportionate share of the fruits of economic growth. The two went hand in glove. When the basic bargain is maintained, the entire economy is balanced. When the basic bargain breaks down, government must step in to reinforce it, or the economy will shrink.
    America learned this lesson in the Great Depression. We also learned it in the Great Prosperity that followed. After that, we forgot it. Now and in years to come we must remember it.

4
How Concentrated Income at the Top Hurts the Economy
    The economic problem Eccles identified and Keynes formalized arises not because the rich live too well relative to everyone else but, paradoxically, because they live too modestly—at least compared to what they can afford. When income is concentrated in relatively few hands, the overall demand for goods and services shrinks because the very rich do not nearly spend everything they earn. Their savings are hoarded, circulated in a fury of speculation, or, especially these days, invested abroad. Some savings find their ways into new domestic investment, but, as Eccles observed, usually only “when the purchasing power of the masses increases their demands for a higher standard of living.” Without adequate consumer demand, investors won’t foresee enough return to make the investments worthwhile.
    Rich Americans may sometimes be conspicuous consumers, but overall they simply do not spend enough. Warren Buffett is an extreme example.The richest man in the world in 2008, with a net worth estimated to be $62 billion, Buffett called money “little pieces of paper that I can turn into consumption.” But to a remarkable extent he chose not to consume.In 2008 he still lived on Farnam Street in the central Dundee neighborhood of Omaha, Nebraska, in the same gray stucco house he bought in 1958 for $31,500. His children attended public schools and shared the family car when they were old enough to drive. He paid for his grandchildren’s college tuition but gave them nothing more. Buffet’s one indulgence was a Gulfstream IV-SP jet that cost $10 million, which he sheepishly named
The Indefensible
.
    Buffett’s parsimony might be considered admirable, but, paradoxically, it contributed to the larger economic problem.“If I wanted to,” Buffett once said, “I could hire ten thousand people to do nothing but paint my picture every day for the rest of my life. And the [gross national product] would go up. But the utility of the product would be zilch, and I would be keeping those ten thousand people from doing AIDS research, or teaching, or nursing. I don’t do that, though.… There’s nothing material I want very much.” Buffett’s economic logic missed a significant fact that John Maynard Keynes emphasized: Every dollar that’s actually spent in an economy has a multiplier effect. Not only does it go to the person who first receives it, but also, indirectly, to other people whom the