Thursday, July 29, 2010

Khan and Caplan on Savings

Razib Khan, at the Discover blog, has an interesting post up on a Jonah Lehrer post about early childhood investments, reviewing a recent Heckman paper on preschool. Khan brings in an older paper that looked at the cognitive and non-cognitive impact of early childhood education. The cognitive impact apparently wore off over time, but the non-cognitive impact persisted. Khan relates the non-cognitive effect to the adoption of "bourgeois values", including what he mentions as a lower time preference. He goes through an interesting discussion of the results: is the impact a result of actually changing the brain at a critical point (much like how young children can acquire languages easier than older children), or does it have to do with peer groups? He also links to an interesting former post of his discussing genes and saving behavior as well as culture and saving behavior (both are important).

It's not all that strange to think that time preference is culturally informed. That's the Weber thesis. It's also not all that strange to think of it as genetically determined - low time preference is a fantastic trait to evolve if you want to set up your ancestors for success (granted, first you have to evolve an ability to think abstractly about time in the first place).

All of this meshes very well with Keynes's assertion that savings behavior is as much about psychology as it is a response to economic incentives.

I would also highlight that although Khan only mentions time preference as it relates to savings - it will also relate to investment and the sorts of investments we make. A lot of very important public investments: space colonization, basic research, addressing climate change, etc. are hampered by a high discount rate and short time horizons.


Bryan Caplan also has a post on savings, specifically addressing the critique that expansionary monetary policy and tax cuts won't work because "people will save it". He accepts the liquidity preference justification for the increased savings, and then essentially says "well what's so wrong about satisfying that preference"? I have three thoughts:

1. He does raise a good point that eventually consumer demand could be augmented by satisfying consumer's liquidity preference, but

2. The real glitch isn't consumption - it's investment demand. Now, maybe once corporate liquidity preference is satisfied, they'll start investing because they feel safer. But they're not going to start investing in response to lower interest rates - that's the essential point of the liquidity trap. When cash and bonds become interchangeable because interest rates are so low, further expansion is not going to stimulate activity through lowering the interest rate. Could it stimulate activity through satiation of liquidity preference? Perhaps. But,

3. Wouldn't it be a whole lot quicker, and wouldn't it avoid the risk of substantial inflation after the recovery, if we just augmented demand with fiscal policy? This might not be as attractive if we didn't have a bunch of potential public investments, but... ummm... we do have a bunch of public investments.

I've been fairly agnostic about the monetary policy route - I don't think it holds a ton of promise right now, but I haven't put a lot of effort into shooting it down either. Caplan presents a plausible case for how it could work, but it just seems like it would take so damned long.


  1. "A lot of very important public investments: space colonization, basic research, addressing climate change, etc. are hampered by a high discount rate and short time horizons."

    Alternatively, their is reluctance because one hundred and thousand year predictions about climate change are, well, not something to put much "faith" in. As for space exploration, there is every reason to assume that private enterprise will take care of that.

    On research on childhood development: as a father I've read a fair amount on the subject and come away less than satisfied.

  2. I agree - faith would be inappropriate.

    As for space exploration - perhaps you mean "there is ever reason to assume the private enterprise will take care of some of that".

    I always find this interesting - long term costs are hugely important to libertarians when they militate against government involvement. They are irrelevant when they imply that government involvement might make sense. Kind of odd. I would argue they should be considered under all circumstances, regardless of the consequences.

  3. We're just not going to agree on space exploration.


    "They are irrelevant when they imply that government involvement might make sense."

    It is better to say that they are outweighed by the costs associated with government involvement.

    Since you mentioned libertarians I thought I'd pass this along:


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