The savings “delusion” and capital gains
Posted August 27, 2008on:
Over at the Paul Krugman blog Dr Krugman criticises “conservatives” for treating capital gains as savings. This criticism followed an article by Tyler Cowan stating that people have treated capital gains as savings (article is found here).
Now pinch me if I’m wrong, but I can’t see the issue with
- People assuming that other people treat capital gains as savings if they do,
- People treating capital gains as savings if they expect them to be maintained
I do understand that their is a policy issue if peoples expectations that capital gains will be maintained is not realistic.
There is a difference though – both the above articles seem to be criticising people for the very idea of using capital gains as saving, or assuming that people do. However, sustained capital gains are savings, as it is additional wealth that is not used for consumption.
If we believe that there is an issue, it probably has to do with expectations. In the case of housing we have had a “bubble” where expectations were pushed away from fundamentals and towards speculation. In this case the problem does not stem from treating capital gains as savings – it stems from unrealistic expectations about the future price of the asset!
So why did peoples expectations of future house prices get out of whack in the USA, and now in NZ?