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The Marshmallow Effect needed to address global economy

February 17, 2016 Leave a comment Go to comments

marshmallowYou might have heard of the marshmallow experiment that was carried out with young children. A child was offered a choice between one marshmallow immediately or two small marshmallows if they waited for a short period, approximately 15 minutes, during which the the person running the experiment left the room and then returned. Researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores.

Can this experiment be applied to societies today in that by deferring instant consumption (in order to save and invest) people will enjoy greater incomes as they age?

High saving rates = High investment rates

Jeff Sachs, of the Project Syndicate, recommends 4 actions that are needed to rectify this problem:

1. Global economic progress depends on high global saving and investment. In economic development, as in life, there’s no free lunch: Without high rates of investment in know-how, skills, machinery, and sustainable infrastructure, productivity tends to decline (mainly through depreciation), dragging down living standards.

2. Saving and investment flows should be viewed as global, not national. China has a high savings rate which exceeds local investment needs therefore they can support the low income countries which have limited capital and a very young population. These countries can borrow from China to fund education, infrastructure development etc so to secure greater prosperity.

3. Full employment depends on high investment rates that match high saving rates. Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.

4. High private investments by business depend on high public investments in infrastructure and human capital. Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.

Although there maybe significant savings in banks this doesn’t necessarily translate into greater investment. In the past banks funded infrastructure project and company start-ups however today money managers tend to focus on short-term speculative activities which resemble a trip to the casino.

Investments such as low-carbon energy, smart power grids for cities, and information-based health systems depend on government and private sector partnerships. A lot of private investment needs tone backed by the government to get in the buy in from the private sector. Examples of this are the rail networks, aviation, semiconductors, satellites, GPS, hydraulic fracturing, nuclear power and the Internet would not exist but for such partnerships.

Our global problem today is that the world’s financial intermediaries are not properly steering long-term saving into long-term investments. Global investments are falling short of global saving at full employment which results in inadequate demand as short-term investments tend to be volatile to finance consumption and property.

Advice to China fails the Marshmallow Test

Some economists have stated that China needs to boost consumption (C) and let the renminbi appreciate to reduce exports. However this encourages overconsumption and underinvestment in a country that has high savings and industrial capacity which the global economy can make use of.

Central banks and hedge funds cannot produce long-term economic growth and financial stability. Only long-term investments, both public and private, can lift the world economy out of its current instability and slow growth. Jeff Sachs

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