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Keynes and the Assault on Savings, Part 2


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The reason, I believe, that Keynes’s anti-saving, consume-more philosophy is politically popular is simple: Consumption is immediate and usually enjoyable. Saving requires self-discipline and patience. Also, the philosophy is remarkably bi-partisan. It fits in with the ideas of a massive and ever-growing welfare/warfare state. This gives us a quiet collectivism, “a socialism without doctrines.”

It is a welfare-state socialism in which the conservative George Will, in a speech to a trade association some five years ago at which I was in attendance, could actually brag, “Republicans are doing a better job of running the welfare state than Democrats.” That comment would have disgusted old Republicans such as Robert Taft.

Keynes’s ideas also effectively serve the short-term needs of court intellectuals and career politicians of almost all persuasions. They get elected by seemingly always having answers to every problem, even the ones of their own making, and by always seeming to give citizens some new program whose ultimate price tag is usually nebulous.

Still, these Keynesian solutions, while oftentimes politically effective in the short term, always hurt the economy in the long term. Usually they result in recession followed by another cycle of inflationary boom. That is followed by an even bigger recession, which can then turn into a depression.

The irony is that we are told again and again by consensus historians that Franklin Roosevelt was a great president, partly because he was the first president to employ Keynesian ideas. (He wasn’t. Herbert Hoover tried a variant of Keynes’s countercy-clical principles.)

But certainly Roosevelt’s supposed success can’t be based on his economic record. Most of his realistic admirers now concede that his Keynesian ideas didn’t restore prosperity. They defend Keynesian ideas by saying that Roosevelt didn’t thoroughly embrace them until World War II, just as some Obama supporters already are saying that, if the economy doesn’t turn around, it will be because the president’s stimulus package wasn’t big enough. It is interesting to note that Roosevelt, in a meeting with Keynes, couldn’t understand much of his terminology.

Roosevelt thought that Keynes was more a mathematician than a political economist. He was dubious about Keynes’s “rigmarole of figures,” James MacGregor Burns wrote in his Roosevelt: The Lion and the Fox. And Keynes “was disappointed that the president was not more literate in economics.”

The godsend

Still, the Keynesian preference for consumption over saving as the way to escape a slump or any sort of economic slowdown has been a godsend for politicians. Two sage observers of the U.S. economy have pointed out that the seeming success of the system is based on one of the oldest illusions known to man.

“That one generation can consume — and stick the next generation with the bill. That you can get something for nothing,” write Bill Bonner and Addison Wiggin. These two financial-newsletter publishers predicted the current economic disasters three years ago with their prescient book Empire of Debt.

Nevertheless, pols and press insist that saving is not good for the economy, that we should also consume now for the good of the country. Indeed, a recent, poorly documented, cover story in Newsweek magazine (March 23, 2009) told readers to “Stop Saving Now!” It warned, “If everyone saves during a slack period, economic activity will decrease, thus making everyone poorer.”

There are several things wrong with Newsweek’s neo-Keynesian view that saving is counterproductive. Won’t the people who decreased their bills and increased their cash balances by saving be richer? And won’t society be richer because more savings will put downward pressure on interest rates, thereby allowing more people to afford various things? Will money saved go under mattresses or will it go into banks or money markets and be invested?

And since when in a free economy, does “everyone” save or spend or pursue any economic action all at the same time unless Newsweek, the magazine that once predicted a coming global ice age, is advocating a form of central planning?

The Newsweek article also called those holding cash “hoarders.” That is a term straight out of The General Theory. Behind this thinking is a misguided idea that goes back to the 1930s: Keynes assumed, as the Obama administration now does, that the chief source of demand lies in consumption, not in production. It also assumes that consumption and production are very different.

But even the consumer, one who accepts the Newsweek/Keynes/Roosevelt/Obama consensus and doesn’t want to save, has a stake in the savings debate. He often is dependent on borrowed money for a better lifestyle. He can’t have that lifestyle unless somebody saves. And even if he scorns the thrifty neighbor, he should consider this: Savings also ultimately expands the capital pool.

A bigger capital pool leads true interest rates to decline. And this typical consumer obviously borrows frequently to enjoy a higher standard of living today, so he — along with the U.S. government with tens of trillions of dollars of debts — will have a stake in keeping interest rates as low as possible.

By “true interest rates,” I mean interest rates that accurately reflect the cost of money, not the official rate of the central bank, the Federal Reserve. Despite the massive amounts of information available to central bankers, Fed rates are still a guess. And Fed rates, as we learned in the era of Fed chairman Arthur Burns, can also be driven by political forces.

Burns, Fed chairman under President Nixon in the 1970s, kept interest rates artificially low to help ensure Nixon’s reelection. That decision later resulted in stagflation, something that wasn’t supposed to happen under Keynesian economics.

Burns’s politicized interest-rate policies were repeated by Alan Greenspan. Indeed, in his recent memoir, The Age of Turbulence, Greenspan conceded that he eased the Fed’s loan criteria to help more people buy a home. That was a decision taken in part because of pressures from Congress and the president. All of them thus encouraged the explosion of subprime loans.

The central bank, backed by bipartisan political leadership, once again has been wrong. But now, after generations of lower and lower saving rates accompanied by cheap-money policies that were supposed to prevent recessions through strong levels of consumer confidence, it is time to return to the basic common-sense principle of what helps an economy grow and prosper — savings. Thrift is never something to be scorned. It is an economic tool that promotes growth.

Macro-economic effects

Savings can’t be created out of thin air the way the Federal Reserve creates money, yet it is critical for a growing economy. Indeed, if savers didn’t exist, someone would have had to invent them to ensure an improving standard of living.

“Those saving — that is consuming less than their share of goods produced — inaugurate progress toward general prosperity,” wrote economist Ludwig von Mises. “For the seed they have sown enriches not only themselves but also all other strata of society.”

Indeed, saving allows more and more people to afford things. It raises the standard of living without the public and private sectors’ running up huge levels of red ink. After all, ultimately savings is consumption. It is deferred consumption. It is the effect of what Austrian economists call a higher “time preference.”

The preference of some is to delay consumption today in exchange for a reward tomorrow. The reward can be called interest. In the meantime, savings is not a negative. It is not a drag on the economy. It boosts the economy. It is the lifeblood of growth.

“From a national macroeconomic view, when personal income is saved today, it becomes available for lending to the business sector,” according to the Employee Benefit Research Institute (EBRI). “The business sector can then use the resources for capital investments that will promote economic growth.”

What does this mean on a basic level to the average person?

It is savings that allows businesses to expand and hire more workers. It is savings that gives workers more tools, which makes them more efficient. It is savings that allows Freedom Daily and other publications, for example, to exist with a fraction of the workers that would have been needed a generation ago.

Many publications, many businesses would not exist today without the tools most of us take for granted. Those tools were made possible by savings, by people who didn’t consume as much as they could have yesterday in exchange for some reward today. Therefore, today’s workers are far more efficient than those a generation ago.

Without sufficient savings, many small businesses lag along and are never highly profitable. That’s because they can never afford to make themselves more efficient. Savings also ensures that effective wage rates— wage rates that outpace inflation — can rise.

In my life as an obscure journalist I have worked for numerous small radio stations and newspapers. The worst ones, I finally noticed, always shared one trait: They were so capital-poor that equipment was bad and employees were poorly compensated. Therefore, key people left as soon as possible and the firm missed opportunities to prosper from human capital, the best kind of capital.

Micro-economic effects

Worse than the macro-conomic effects of low savings are the micro-economic effects. A person cannot or will not be able to provide adequately for his future retirement or for another goal. And, without sufficient savings, he inevitably sees his standard of living decline today and in the future. (There is no home purchase in that nicer neighborhood, the dream of a small business never becomes a reality, and so on.)

Is it a coincidence that as the average American worker has lost buying power corrected for inflation over the past 35 years or so, the savings rate has gone down? Yet that issue is rarely explored in major media.

Government mismanagement of the economy in the age of Keynes has hurt the individual in several ways in the quest for self-improvement. First, increased government spending has resulted in debts that have to be monetarized by the central bank. Even if the average person had more dollars, his buying power is reduced by persistent inflation.

Second, the interest earned on saved dollars — unless it is in a qualified retirement account — is taxed every year. Yes, trillions of dollars are stowed away in these qualified retirement savings accounts. However, given that Social Security payments at one time were not taxed and now are (except for impoverished people), and given that unemployment benefits at one time were never taxed and now are, is it not reasonable that one should be fearful that some future government also influenced by Keynesian ideas — maybe this government — could face financial disaster and, needing more “revenue” fast, do the unthinkable?

As we have seen, too little savings has been the problem for decades in America. We now live in a country in which even the term for income generated by investing and saving is ominous. It is “unearned income.”

That term smacks of Marxism, of surplus value. It is as though the investor or saver is somehow an evil person who unjustly takes from some victim. When he was U.S. Commerce secretary back in the 1970s, Peter G. Peterson, in his book Facing Up, said, the U.S. anti-saving policy amazed his Japanese counterpart.

“Mr. Secretary,” the Japanese official asked Peterson, “please explain putting the highest taxes on what you call unearned income. We have always assumed that income from savings was the most earned of all. It is hard work to save, don’t you think?”

Clearly, government policies over decades have been at odds with that sentiment. What can be done to change this sorry record of penalizing the saver, whose disappearance is hurting the economy? The source of much of our economic problems requires a philosophical change. A good place to start would be to jettison the ideas of John Maynard Keynes.

Part 1 | Part 2

Gregory Bresiger is a business writer living in Kew Gardens, New York. Send him email.

This article originally appeared in the November 2009 edition of Freedom Daily. Subscribe to the print or email version of Freedom Daily.

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    Gregory Bresiger, an independent business journalist who works for the Sunday New York Post business section and Financial Advisor Magazine, is the author of the book Personal Finance for People Who Hate Personal Finance.