Six months after supporting aggressive government spending, Federal Reserve Chairman Ben Bernanke said today that the US needs to significantly reduce the federal budget deficit. At the same time, he said Asian countries need to encourage their people to buy more stuff.
Admittedly, just as increasing private saving in the United States is challenging, promoting consumption in a high-saving country (like China) is not necessarily straightforward. One potentially effective strategy is to reduce households’ precautionary motive for saving by strengthening pension systems and increasing government spending on health care and education. Of course, such measures are likely to improve welfare and productivity as well as to contribute to more balanced, robust and sustainable economic growth.
On the first part, yes, Mr. Bernanke, it is difficult to encourage private saving when the interest rate is zero. Wall Street has made gobs of money this year off the low rates, but my savings account has netted $3.12.
As for part two of this new “stimulus” plan, is it possible that China doesn’t want to overspend and stretch itself beyond recognition, like certain other countries have?
For the record, here’s what Bernanke said six months ago. From the New York Times, March 3, 2009:
“All else equal, this is a development that all of us would have preferred to avoid,” Mr. Bernanke told the Senate Budget Committee, referring to record-breaking deficits expected this year and in the next two years. “But our economy and financial markets face extraordinary challenges, and a failure by policy makers to address these challenges in a timely way would likely be more costly in the end.”
I’m having a hard time making out the Fed’s overall strategy. As far as I can tell, here it is chronologically:
Step one: Gov’t SPEND. Americans SAVE.
Step two: Gov’t SAVE. Americans SPEND. No, make that Americans SAVE too.
Three: Other countries, tell your people to SPEND, while we SAVE to clean up the mess from our SPENDING.
Maybe I’m wrong. Does anyone have a different read on this?
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