Monday, May 27, 2013

Interview with Christopher Carroll on Saving and Presidential Communications

The Richmond Fed publishes an insightful "Interview" with Christopher Carroll in its magazine Econ Focus for the First Quarter of 2013. Here are a few highlights:

Why the national savings rate matters

"What the saving rate is ultimately about is the aggregate capital stock and aggregate national wealth. You’re not going to put much of a dent in that with two or three years of a low saving rate. But if a country’s saving rate is low for 20 or 30 years, then you end up a lot poorer. I do think that before the crisis our saving rate was lower than is wise or sustainable. ... One way of saying a little bit more about that is to look at a longer history for countries that have been in a reasonably stable developed equilibrium for a long time. Most such countries tend to have personal saving rates somewhere
in the 5 percent to 8 percent range. I think when our saving rate gets below that range for a sustained period of time, that’s something that one ought to worry about."

Why don't fast-growing countries borrow instead of save?

"The theory in every textbook says that if you know you’re going to be richer in the future because you’re a fast-growing country, why in the world would you save now, when you’re poor, making your future rich self better off? It makes much more sense to borrow now since it’ll be easy for you to pay off that debt in the future when you’re richer. The latest example that’s on everybody’s minds is, of course, China, a country that has grown very fast for the last 20 years and has had a saving rate that just seems to get higher every year. ...  But what China is doing right now actually looks virtually identical to Japan 30 years ago. Japan didn’t have a particularly high saving rate in the 1950s, and by the 1970s it had the highest saving rate in the world, and that was a period of high growth in Japan. It’s also true in South Korea. It grew at a very rapid rate starting from the early 1960s, and its saving rate went up and up. We also see this in Taiwan, Singapore, and Hong Kong. And it’s not just East Asian countries; the same is true of Botswana and Mauritius. It’s also true in the opposite direction for European countries, which were growing pretty fast after World War II. ...  So it seems to be a pretty pervasive, large effect that is really very much the opposite of what you’d expect from the standard off-the-shelf models. ... In fact, what I really think is the right story is one that combines habit formation and a precautionary motive, such that they intensify each other. If I have these habits, then a good reason to resist spending when my income goes up is uncertainty over whether the factory that I’m working for will close down and I’ll have to go back to my rural peasant roots."

Why people let their employer choose their retirement savings rate

"There’s an impressive body of new research that finds that people’s retirement saving decisions are very much influenced by the default choices in their retirement saving plan. ... [In a recent paper, the] authors had data that basically covered the entire population of Denmark; 45 million data points, and they could see people for 15 years. They found that if an employer has a default 401(k) contribution rate of 6 percent, 85 percent of people will just go with 6 percent, rather than changing the contribution rate or opting out. If the default is 10 percent, then 85 percent of people will go with 10 percent. I think the evidence for default contributions is just overwhelmingly persuasive. That is a really big challenge to the economists’ standard modeling approach, which is to say that people rationally figure out how much they need to have when they retire and they figure out a rational plan to get there. ...

"The explanation I proposed at the conference was to say that, within some range, people trust that their employer has figured this out for them. The job of the human resources department is to figure out what my default contribution ought to be, and it would be too hard to solve this problem myself, so I’m just going to trust that somebody else has done it. It’s not different from when you take an airplane and you trust that the FAA has made sure that it’s safe, or when you go to the doctor and you trust that the advice makes sense and is not going to poison you. Maybe people trust that the default option is going to be a reasonable choice for them. ... If people are going to trust the employer to make a good decision, we ought to make some effort to give the employer the incentives to actually make that good decision."

Carroll was a senior economist at the Council of Economic Advisers in 2008-09. Why doesn't the president offer the best possible economic arguments in his speeches?

"The CEA tends to vet speeches that the president and sometimes other officials are going to make, and to help set the priorities for what’s going to be in the speeches. A number of times we would help to reshape the speech to make sure that key points were highlighted, and the arguments that we thought were the soundest economic arguments were made. And then the president would go out and give the speech, and I would later hear from economist friends, who would write to me complaining, “Why didn’t the president say this obvious point in the speech that he just made?” And that obvious point was the thing that the CEA had deliberately made sure was actually a highlight of the speech! But, of course, what your friend actually sees is the 15 seconds that gets excerpted on the news or some blogger’s two-paragraph reaction to the president’s speech. ... The president has a greater ability to express his point of view and get it heard than any other single person. But I think the extent to which even the president can’t penetrate through the fog of information and the vast number of sources of data that people pay attention to is underappreciated."