James Livingston: Corporations Don’t Need Our Savings


James Livingston loves consumption, is skeptical of private investment. Paul Solman pushes him further on positions Livingston raised in a story on the NewsHour Thursday.

James Livingston makes three economic arguments in favor of consumption over private investment/greater production. 1) Without enough buying, a consumer-driven economy like ours swoons; 2) Growing inequality in America exacerbates the problem of too little consumption — in economese: “insufficient aggregate demand”; 3) private investment hasn’t driven the US economy for nearly a century.

This third argument is Livingston’s contribution to the current tax-and-spending debate. Because if it has merit, it undermines the argument in favor of lower taxation on the well-off: that lower taxes will lead to more private investment which will inevitably, in John F. Kennedy’s phrase, “lift all boats.”

Livingston’s argument has already stirred comment in cyberspace. Here’s a fuller version of what he said when I interviewed him. (Both my questions and his answers have been cleaned up to make for easier reading.)

Paul Solman: So what’s wrong with the argument that it’s not consumption, but production and productivity that makes us richer and richer?

James Livingston: The problem is that they assume that private investment drives growth and that private investment derives from savings. In fact, for 100 years now, growth has been driven by consumption. So to say that we need to increase productivity by more savings and more investment is to violate, it seems to me, the historical evidence, which is clear for the last 100 years.

PS: But it makes intuitive sense, no, that we invest, we build newer and better things and we’re all better off?

JL: Yes, it does make sense. It just doesn’t work that way anymore. It hasn’t since about 1919. After 1919, what happened was something remarkable and for the first time in human history you could increase productivity, you could increase output without greater inputs of either labor or capital. The 1920s was the watershed decade in that. So, after 1919, all bets are off. And when Hayek and others argue that what we need to do is increase savings and that’s going to take us into recovery or provide for long term growth, again the problem is the historical evidence says something else altogether.
So if it isn’t more labor and it isn’t more capital, what makes us richer?

More consumption. More demand. If we allow consumer demand to drive growth, we’re safer and we’re going to have more balanced growth than if we allow it to be driven by savings.

PS: But you save money; you invest it in a new drug process, for example, or a new hi-tech product which makes everybody better off — it’s intuitively obvious.

JL: Yes, it’s intuitively obvious, but let’s break down what you said about saving. You save — who saves? Does the corporation save? It has profits, right? Does it need those profits to innovate? Probably not. Depreciation funds are enough to improve the productivity of most capital stock — again, that’s been happening since 1919. So what are those savings? They come in the form of profits.

PS: Yes. Rich people and corporations save, reinvest their profits in new, better things that make us all more prosperous.

JL: Do they? Do they reinvest? It seems to me the evidence of the last 4 years is that these banks and these corporations are awash in money. I don’t see any investment activity; therefore, I don’t see any growth. But on the other hand, if they withhold all of those savings, all those profits from circulation, then we’re going to have continued stagnation. I guess the question is: What do they invest in? The typical scenario is a corporation gets profits, reinvests in plant and equipment and therefore produces more with less labor; with less input. But corporations don’t need those profits to improve productivity or outputs — so what do they do with them? They park them with the banks, or they invest on their own in speculative channels.

PS: But all the startups that are happening; all the drugs that need clinical trials; this is investment, isn’t it?

JL: Most of those medical trials, most of that kind of investment, is a public/private partnership. Public investment, public spending, is driving the research and development. We have to talk about that as opposed to simply private investment. The other thing about the startups is that most startups die off within 18 months. That’s their lifespan. Most small businesses don’t pay very good wages, and most small businesses don’t provide health benefits either. So I think our fetish about helping small business doesn’t help us when it comes to employment and it doesn’t help us, I don’t think, when it comes to growth, because, let’s say, that 60 percent of the jobs are created by small business. Those jobs disappear in 18 months.

PS: Are you suggesting that less and less investment is needed in order to get what we now understand to be productivity?

JL: Precisely. Yes. In fact, I would say that private investment is a shrinking part of the larger pool, shall we say, of investment. The growth pattern looks like this since 1919; there’s more public investment, on the one hand, and there’s more residential investment on the other, which I treat as a form of consumer spending. So in that sense, net private investment has been shrinking; has been declining, absolutely, since 1919. It’s a shrinking part of this puzzle. Why then do we have this idea that we have to reward private investors, the so-called job creators? We don’t need to. What you said to begin with was, yes, private investment is a small part of this. Why then fetishize it?

PS: So when young entrepreneurs I know who are starting businesses tell me that they don’t even take any money from venture capitalists, for example, because they just don’t need it; that’s the latest stage in a trend you say has been happening for almost 100 years.

JL: Yes. In fact, corporations don’t need the savings that banks are supposed to be providing them. They don’t need it. They can finance their growth out of retained earnings, depreciation funds, whatever. So yes, that’s interesting, because that’s the completion of the trend that begins in 1919.

PS: So productivity is going to grow on its own? That’s what “total factor productivity growth” is: just technology generating more technology, more insights, putting together different elements of growth and you grow willy-nilly?

JL: Yeah; that’s certainly how it’s happened, again, since the 1920s. Except that I think the linchpin here, the keystone, might be the research and development provided by government spending; public spending. And then the public spending that validates, or affirms, this technological kind of innovation.

We can do all the research and development in the world; we can develop all kinds of technologies; if there’s not sufficient consumer demand to buy the goods, then what? Then what happens? Then we have stagnation; we have economic crisis, which is what we’ve got on our hands now.

The theory that Hayek and others have brought to us, as against, say, Keynes or Marx or whoever you want to choose — what it does, it reinstates the investment function of private enterprise, private investors – we used to call them capitalists. It magnifies that role in the modern world in ways that are very satisfying to people who believe that the way we do things now is the way we should always do them.

The problem with it is that these private investors, these so-called job creators, don’t, in fact, drive the economy. They just don’t.

PS: They don’t create jobs?

JL: They do not, and they haven’t for the last four years, and for that matter, they haven’t for the last 80.

PS: Well, there have been a lot of jobs created in the last 80 years.

JL: Yes, but consumer demand has driven that growth and it seems to me that the key to it — the explanation that you need — is to look at the 1930s and ’40s and ’50s. That’s the heyday of consumer culture — the New Deal first, then the Second World War and then the decade of the 1950s.

PS: But military spending wasn’t consumption spending, was it?

JL: No, but it created enough jobs to promote consumer spending and then especially in the 1950s with the conversion of military spending to regular private spending. The whole era between 1933 and 1973 — if you look at it minus 1941-45 — it’s driven by consumer spending. The fastest growth rates of the 20th century are recorded 1933-37, when net private investment not only declined, there was net capital consumption in the ’30s.

PS: But if government spends, then there’s enough demand to draw producers to make the things that will make us rich.

JL: Yes. Demand drives everything and the question is: What kind of demand do we promote? What kind of demand do we want? What kind of growth, in effect, do we want?
In the post-war world — that is to say, the beginning of the 1950s and ’60s — the economic debate worldwide was between: Shall we have extensive growth — capital stock driven, investment driven — or shall we have intensive growth? The most far reaching theories that we know of came here with the development of Keynes’ theories, but also in Eastern Europe, where people said: Up until now we’ve had extensive growth, driven by industrial investment “by the plan.” What we need to do is make the transition to intensive consumer driven growth, because if we don’t, Eastern Europe will stagnate. They were making these arguments in the 1960s and everything they said came true in the ’70s and 80s. That’s what led to the fall of the Berlin Wall.

PS: We beat the Soviet Union by consuming better?

JL: Yes. We beat them by shifting from extensive capital stock investment — private investment-driven growth — to consumer demand.

PS: And so that old cliche about how the Russians loved our jeans and Beatles records is an accurate account of how we won the Cold War?

JL: It’s one of the arguments I make in the book “Against Thrift,” yes, that consumer culture was a political piece of dynamite in Eastern Europe.

PS: The transition to modern consumer culture.

JL: Yes.