Crawl Across the Ocean

Monday, January 05, 2009

Zeno Has Nothing On These Guys

The Globe Editorialists ponder an apparently perplexing paradox: On the one hand, Canadians have a higher propensity to save then Americans. But on the other hand, Canadians have more savings than Americans. A tough one, I know.

In the Globe's words,

"The difference here is not huge, but it is consistent and significant. For example, Canadians and American consumers are four percentage points apart when asked whether they intend to spend less in 2009; in Canada, 62 per cent said yes, as against 58 per cent in the United States. Other questions yielded similar answers.

The contrast is striking not only in the light of the comparative health of the Canadian economy as a whole. When, more specifically, the economic conditions of households in these two North American countries are considered, levels of debt and net worth are more favourable in Canada than in the U.S., which means that Canadians are paradoxically better able to spend, but less willing to do so."

It's a puzzler all right, we might need to invent another branch of mathematics to solve this one*.

This is part an editorial where the Globe chides Canadians for not doing their rock and rollpatriotic duty by taking on more debt and spending more money in order to keep the economy growing.

Says H & Mthe Globe,
"Canadians should spend wisely, but spend nonetheless. They might reasonably cut back on some immediate pleasures, but they should think seriously about taking advantage of lower or stable price levels. Pleasure may be compatible, however, with quality and durability; consider women's clothing, for example, the prices for which fell in 2008 in Canada."

I'd respond but someone has already said all that needs to be said in the comments,

"Wait a minute ... Americans basically CAUSED this worldwide problem by being too willing to spend more money than they had, getting into unsustainable levels of debt, and now it's a problem that Canadians are more cautious in their spending than the most reckless consumers on the planet?


On a final note, is it too early to nominate 'paradox' as one of the most overused words for 2009? It's been a perfect storm of paradox references in my recent reading.

* It took the development of calculus to solve many of the paradoxes posed by Zeno in ancient Greece.

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  • This is Keynes' "Paradox of thrift".

    In normal times, saving is a good thing, because savings = investment, and investment = the creation of productive capacity.

    But in recessions, productive capacity isn't the problem; what's missing is demand. So if people cut back on spending, the problem gets worse.

    By Blogger Stephen Gordon, at 3:50 PM  

  • Sure, Keynes paradox of thrift I can understand, although I'm not entirely convinced it's true or that it's any kind of a threat at the moment (is our savings rate still negative?). It's the Globe's paradox of how people who save more end up with more savings that I have trouble with.

    By Blogger Declan, at 6:43 PM  

  • That was the original paradox of thrift: if everyone increased savings rates, incomes would go down and depending on the relative sizes of the two effects, total savings (savings rate * income) could go down. But if everyone reduced savings, they'd be saving a smaller fraction of a larger pie, and the total could increase.

    It's theoretically possible, but you need to do some data work to figure out which effect is stronger. Sort of like the Laffer Curve.

    By Blogger Stephen Gordon, at 4:52 AM  

  • To clarify, it would appear that the Globe is working under the assumption that the income effect is stronger than the savings rate effect.

    Then again, if you have to already know all this stuff to figure out what they're saying, then maybe they should have just run a picture from lolcats.

    By Blogger Stephen Gordon, at 4:56 AM  

  • You're giving them way too much credit, in my opinion. I'd say they just don't think through what they're saying.

    By Blogger Declan, at 7:23 PM  

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