Friday, June 14, 2013

Euvoluntary Frugality

Exchanges are euvoluntary if they meet the six conditions. But what of the failure to exchange? Can frugality be euvoluntary?

There are trivial examples where failure to exchange could be tinged with regret or could amplify externalities. If I don't buy a crash helmet and I end up skidding on a patch of wet asphalt after a surprise downpour, my earlier decision to save a few bucks could end up costing me my ability to speak. If I scrimp on waste reclamation technology in my tannery, I might end up dumping toxic waste into the local watershed. That's not quite what I'm talking about though. I mean just ordinary spending. Is it euvoluntary to stay at home and eat a microwave burrito instead of patronizing Carlos and his taco truck even when you can clearly afford it?

There's a sort of theory in economics called the paradox of thrift. The way I understand it is like this: it might be individually wise to save for the future, but if everyone does it, it's contractionary, since consumer spending is such a large component of GDP. I say that it's "sort of" a theory, since it's predicated on the tendentious grounds that GDP is both a welfare metric and a policy end. Still, if it's right, it suggests that higher discount rates are normatively good, as reflected in growth statistics.

Then again, every dollar I spend on extra guacamole is possibly a dollar taken out of my daughter's college fund. Or out of my retirement plan. Are these any less euvoluntary than that burrito? Bounce savings decisions against the EE conditions. I can't easily pick out a violation. This suggests to me that most folks also don't sense a moral conflict.

So why do we have interest rate manipulation by central bankers?

Wait, what? What's the connection?

Okay, one way to think about interest rates is that they're prices. Specifically, the price of delaying consumption, or the price of borrowing. The price of waiting if you will. Low interest rates means that it's cheaper to borrow, more expensive to save. QE policies, whether through liquidity arguments or through interest rate arguments, are meant to tickle the here-and-now, to boost today's GDP figures. They suggest, if not outright declare that voluntary savings aren't truly voluntary. They aren't euvoluntary.

Are they right? Why or why not?

1 comment:

  1. Voluntary savings might not be euvoluntary because failing to participate in markets and thus boost the economy as a whole is an externality.

    That line of thinking poses some interesting questions for the whole euvoluntary principle though; if I open a taco stand across from stan's taco stand, is his loss of revenue due to the destruction of his monopoly an externality?


Do you have suggestions on where we could find more examples of this phenomenon?