Saturday, August 22, 2015

Supply side

This excerpt from a 2009 AP article, from the middle of the Great Recession, illustrates the savers revolution that was then underway:

Grace Case, 38, of Syracuse, N.Y., is a self-described recovering creditaholic. For 13 years, she charged it all—cars, clothes, repairs, vacations. She’d make only the minimum card payments to sustain her buying spree for her and her family, which includes her husband and two children.

But after being laid off 2½ years ago from her job as an accountant, she landed another accounting job that cut her salary from $60,000 to $40,000. It was impossible to meet minimum payments on her card balances.

Now, the Cases are on a strict budget. They take “staycations,” grow their own vegetables, buy only used cars and pre-pay cell phones. Case hasn’t used a credit card in two years. And she’s saving more.

“It’s really a liberating feeling,” she said. “If you want something, you have to have the money for it.”

She’s making a third less and she’s happier than before because her outlook is dominated not by debt, but by the possibility of seizing opportunities that consumption on credit forbade her. It’s a bummer that Keynesians discourage the opposite: ever-increasing debt, ever-decreasing responsibility, to fuel aggregate demand. The economy can’t grow without some entity, either households or the government, not practicing sound economic principles, so it goes.

The Keynesian formula for growing the economy—stimulate wealth creation by stimulating demand—holds economic growth hostage to debt. Levels of consumption must be maintained to sustain economic growth, Paul Krugman argues. What about America’s $60 trillion in credit market debt? How this can go on, Krugman doesn’t say. The point at which debt interest crowds out private investment is Keynesian economics’ terminus. It is not a sustainable formula for growth.

Demand-side economics supposes the wealth of future generations will be built on consumers’ backs. But the creativity of the free market is all on the supply side. Let’s go back to 2008. Uncle Sam’s stimulus checks have arrived in the mail and America is ready to go shopping. They’re still limited in what they buy by what producers provide. The next big innovation or invention, the thing people don’t imagine they want until it’s put in their hands, someone has to take the risk to bring that to market. If all the economy is is a response to aggregate demand, nothing surprising is created that displaces old inefficiencies or technologies, that brings a net increase in value. It’s an entropic view of the system, doomed to stagnation and decay. Demand-side economics erroneously displaces the creativity of producers with the voraciousness of consumers.

So is savings—demand short of supply—truly a detriment to the economy? George Gilder writes in Wealth and Poverty:

Saving is often defined as deferred consumption. But it depends on investment: the ability to produce consumable goods at that future date to which consumption has been deferred.


The old adages on the importance of thrift are true, not only because they signify a quantitative rise in investable funds, but because they betoken the imagination and purpose which make wealth.

Capital investments, which fund free market experiments, which grow wealth by acquiring knowledge and, when successful, by adding value to people’s lives, are made with large sums acquired over time (i.e., savings). Gilder writes further:

Saving, in fact, signifies a commitment to the future, a psychology of production and growth. Since World War II the countries that have saved most, preeminently Japan and other Asian capitalist lands, have grown fastest.

Confirming David Stockman’s analysis that savings brought the U.S. economy out of the Great Depression, not New Deal aggregate demand. The savings rate was 35 percent by the end of World War II. The average person saved a third of his money, unheard of in the modern era. The saving rate today of roughly 5 percent is the highest since the ’90s. This money accumulated as disposable income that funded and launched millions of free market experiments, setting the economy on course after years of New Deal market meddling and malinvestment.

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