Peter Orszag, now a new vice-chairman of global banking at Citigroup and former US Office of Management and Budget under Barack Obama, has written a provocative and (with all due respect Peter) wrongheaded Financial Times op-ed proposing that the way to promote savings among America's low-income workers is to attach the prospect of winning millions to them scurrying away a few dollars here and there -- sort of a lottery ticket that goes into their savings rather than into state coffers to help subsidize education or to the profits of the local milk and cigarette stand.
At the New America Foundation, I have colleagues who are most likely the world's leading experts on generating savings among the underclass, or "banking the unbanked" as New America's Reid Cramer or Ray Boshara would say. But suggesting that America's savings problem be solved by establishing an Eva Peron-style lottery incentivizing those with little to save doesn't understand the dynamics at play in the American economy today.
American growth, indeed global growth, this past decade was moving upward at a fast clip in part because household consumption was surging well beyond normal patterns. Whether it was inflated 401k values or bubble-driven home prices, working families had confidence that they lived safely in a "just-in-time money, just-in-time jobs world."
In other words, credit was easy, trust in America's financial health was high, a job lost could easily be filled by a job or two gained. Just-in-time income is a sign of hyper-confidence that the inflow and outflow of funds will be manageable -- sort of like Toyota's just-in-time production system in which it doesn't warehouse materials and supplies but brings together all of its componentry in a just-in-time assembly process.
The trust is gone. The US government and Wall Street managed to not only inject fear and uncertainty deep into the American market and household sector -- but also managed to export toxic financial products to the rest of the world, undermining global trust in US economic leadership.
When households are stressed out about the future, fear losing jobs or unemployment insurance, or see an economy that is not producing enough jobs to keep pace with those coming into the workforce, people save -- and that is what is happening today. People are saving, as Orszag notes in his article, writing that savings has risen from 1.4 percent of income in 2005 to 5.8 percent in 2010. While he properly notes that a further dramatic rise in savings would hurt the economy and constrain a return to badly needed consumption in the short term, he argues that America needs more savings in the long run -- and then says that a lottery for poor folks is the way to get there.
First of all, in many states, working class and lower class/non-working Americans are already the bulk of lottery ticket buyers -- which is essentially a tax on them to support parts of the state education infrastructure. I suppose to draw them away from one lottery-incentivized behavior to support their own savings interests, it could make sense to generate yet another lottery-incentivized behavior. But then who would pick up the newly neglected education tab?
But more importantly, the savings and investment ratios in the United States are a function of another kind of faulty logic -- one that says that America as a whole should "trust" the international system to provide unlimited financing for unlimited gluttony (i.e. consumption from China and elsewhere) and that the working middle class need not fear offshoring of jobs to China and Southeast and South Asia because this is moving America up the value chain and that new, high wage jobs and opportunities will be created out of the churn. The selling point from firms like Citibank is "trust" the international economic order to provide alternatives for what is taken away -- just-in-time manufacturing jobs, just-in-time financing, just-in-time opportunity.
But the rest of the world doesn't operate it. Martin Wolf of the Financial Times once told me that the self-interested, strategic economic behaviors of other major economic stakeholders in the international system required a "patsy" -- someone who would believe in the "just-in-time" security of give-and-take trade and give-and-take finance and jobs, even when its competitors didn't. That is the United States. (To be fair, when I told Martin Wolf that he had said that to me, he said it was impossible because the word "patsy" was not one that fell easily from his lexicon -- but he said that the concept was basically right, and I suggested that "sucker" or "chump" might be just as good, to which he nodded.)
My recommendation to leading economic officials is to get back to the real issue here -- not whether one can create gimmicks to nudge poor people to become the savings backbone of a newly re-energized American economy, but rather to realize that the nation itself can only re-earn real trust from its citizens and respect in the international system if it reinvests in itself, in its innovative sectors, in infrastructure, and creates incentives for surplus nations in the world like China, Germany, and Japan to invest in high value added manufacturing operations inside the United States.
A non-defense discretionary spending freeze for five years, which Barack Obama has proposed, is not a trust-building budget that conveys that America will be more innovative in the future and on a higher growth path. It is a flounder-in-place budget while China and India leapfrog forward.
A major national infrastructure investment push could be a serious event in US history at this point -- and would keep working, low-income Americans on track, investing in themselves when they need to, saving when they need to, borrowing when they need to -- in order to try and secure a better set of opportunities for themselves and their children in the long term.
Eva Peron-style lotteries are just another gimmick of social engineering -- that just builds on the short-term sorts of thinking that we have seen coming for years from the big financial houses in Wall Street and from their agents and proteges in Republican and Democratic administrations.
Steve Clemons publishes the popular political blog, The Washington Note. Clemons can be followed on Twitter @SCClemons
Follow Steve Clemons on Twitter: www.twitter.com/SCClemons
May Citibank suffer badly due to the EDNY MERS decision.
*Scurrying* away a few dollars? Inconceivable.
http://www.youtube.com/watch?v=G2y8Sx4B2Sk
American growth surged because household consumption surged? Of course it did. Feel poor because you are poor? There's a cure for that. Persuade lenders to lend you a fortune that you can't afford to pay back, and suddenly there's a sports car in your drive, a holiday home in the hills, and all sorts of other goodies. Life is sweet! But there's always the sugar-crash afterwards. Americans may think they're immune because unlike other nations they can always double-up. Always! But like any inveterate gambler they will ultimately discover that even the largest casino has house limits.
You're trying to imply that savings are somehow bad. But savings don't just go under the mattress. The recipient of them is expected to invest them in some way. Savings aren't just good - they're the only thing that can save you. It might not seem that way when the sports car is no longer in the drive, but that sports car wasn't a sign of prosperity. It was a big weight around your neck.
So the idea, that we should entrust this system with investment in any sort of plan is downright insane. The best role of gov't is to create and regulate a system that encourage investment by the private sector. There are great resources and more importantly millions of people striving to make better and competitive decisions. The government's policies dictate the general flows, confidence, incentives, etc for this investment. This is what we should be focusing in on.
If I had to encapsulate into fewer than ten words the entire "problem" that faces the massive Gordian knot that is America's monetary problems, I could scarce find better more effective words. Americans have absolutely no incentive whatsoever to save anything, and are given fewer and fewer real opportunities to do so. The is because living hand-to-mouth in the moment does not afford anyone the luxury of looking farther into the future than the next moment of hunger, privation, anxiety, and want that pervade daily life for the bulk of Americans today.
I still believe by and large in the common sense and wisdom of the American people. They know that saving is a good, and necessary thing. It is something they want very badly to do, for their children, more than for themselves. It is the great Dark Mass of fiscal Robber Barons that have stripped away any real reward that encourages savings from average people. Banks return ridiculously low rates of interest on all types of accounts, certificates and the like, while the men who run these banks make obscene amounts of profit, every dime of which is in some way taken from the smallest "investor" they have-The common people. The fact that some of these people now control the fiscal levers of government does public confidence no good at all. Get bankers out of government, and things might change. But for the common man, Poverty is always the same.
It is cruel that the state (or in America's case individual states) encourage gambling. We know who plays state lotteries; poor people. To justify this behavior because some states spend some of the money on education is a flimsy excuse for government encouraged waste.
The only real way to see if lottery savings accounts encouraged poor people to save more money is to test the idea. This will be fought hard by the states because they need the revenue but it should be tested. To rule it out because you have a problem with our presidents' budget priorities is by sides the point (the two really aren't related). And you'd think of all organizations a left-leaning group like New America Foundation would have the intellectually capacity to understand why state lotteries should be ended no matter what revenue they generate.
Freakonomics had a podcast on this subject several months ago and the concept seemed to get good results in some African countries. Government does not need to advocate burning poor peoples' money (essentially no difference between playing the lottery and setting money on fire).
I disagree with the infrastructure spending to keep Americans at work. Didn't we just do that? Wasn't there a $700+ Billion "stimulus" bill passed last year. Weren't most of the so-called shovel ready infrastructure projects which were supposed to be in the bill not funded?Weren't we fooled with a financial head fake? I won't be head faked again.
The best thing is to get the financial houses of ALL levels of government in order. For the vast majority of levels of government, deficit spending and financial dificulties began before the current recession. They spent more than they received in tax revenue.
Many of the reasons for sending jobs and business overseas can be solved if the US gets its financial and regulatory house in order. US bsinesses would rather produce here at home. The cost of doing business because of the financial and regulatory climate causes businesses to send its marginal production overseas where the regulatory climate is easier and the wages are lower.
Meanwhile our rivers become toxic sludgepits again like they used to be, asthma and cancer skyrocket, and life expectancy drops.
Yep, that's getting our house in order.
Another thing:
I think that the skyrocketing cost of rental housing has much to do with the lack of savings among the poor, and that this has been ignored by the not-so-poor.
The housing bubble has hurt non-homeowners-by jacking the cost of apartments sky-high. I remember one year when the average cost of a ghetto apartment jumped $100 a month, while wages did no such thing!