36 Making Economic Sense
high-interest-rate countries, raising interest rates in the former and lowering them in the latter.
In the days of the international gold standard, the process was simple. Nowadays, under fiat money, the process continues, but results in a series of alleged crises. When governments try to fix exchange rates (as they did from the Louvre agreement of February 1987 until Black Monday), then interest rates cannot fall in the United States without losing capital or savings to for-eign countries.
In the current era of a huge balance of trade deficit in the U.S., the U.S. cannot maintain a fixed dollar if foreign capital flows outward; the pressure for the dollar to fall would then be enormous. Hence, after Black Monday, the Fed decided to allow the dollar to resume its market tendency to fall, so that the Fed could then inflate credit and lower interest rates.
But it should be clear that that interest rate fall could only be ephemeral and strictly temporary, and indeed interest rates resumed their inexorable upward march. Price inflation is the consequence of the monetary inflation pumped in by the Fed-eral Reserve for several years before the spring of 1987, and interest rates were therefore bound to rise as well.
Moreover, the Fed, as in many other matters, is caught in a trap of its own making; for the long-run trend to equalize inter-est rates throughout the world is a drive to equalize not simply money, or nominal, returns, but real returns corrected for infla-tion. But if foreign creditors and investors begin to receive dol-lars worth less and less in value, they will require higher money interest rates to compensate—and we will be back again, very shortly, with a redoubled reason for interest rates to rise.
In trying to explain the complexities of interest rates, infla-tion, money and banking, exchange rates and business cycles to my students, I leave them with this comforting thought: Don’t blame me for all this, blame the government. Without the interference of government, the entire topic would be duck soup. Z
Making Economic Sense 37
ARE SAVINGS TOO LOW?
ne strong recent trend among economists, businessmen, and politicians, has been to lament the amount of savings
and investment in the United States as being far too low. It is pointed out that the American percentage of savings to national income is far lower than among the West Germans, or among our feared competitors, the Japanese. Recently, Secretary of the Treasury Nicholas Brady sternly warned of the low savings and investment levels in the United States.
This sort of argument should be considered on many levels. First, and least important, the statistics are usually manipulated to exaggerate the extent of the problem. Thus, the scariest fig-ures (e.g., U.S. savings as only 1.5 percent of national income) only mention personal savings, and omit business savings; also, capital gains are almost always omitted as a source of savings and investment.
But these are minor matters. The most vital question is: even conceding that U.S. savings are 1.5 percent of national income and Japanese savings are 15 percent, what, if anything, is the proper amount or percentage of savings?
Consumers voluntarily decide to divide their income into spending on consumer goods, as against saving and investment for future income. If Mr. Jones invests X percent of his income for future use, by what standard, either moral or economic, does some outside person come along and denounce him for being wrong or immoral for not investing X+l percent? Everyone knows that if they consume less now, and save and invest more, they will be able to earn a higher income at some point in the future. But which they choose depends on the rate of their time preferences: how much they prefer consuming now to consum-ing later. Since everyone makes this decision on the basis of his
First published in November 1989.
38 Making Economic Sense
own life, his particular situation, and his own value-scales, to denounce his decision requires some extraindividual criterion, some criterion outside the person with which to override his preferences.
That criterion cannot be economic, since what is efficient and economic can only be decided within a framework of vol-untary decisions made by individuals. For the criterion to be moral would be extraordinarily shaky, since moral truths, like economic laws, are not quantitative but qualitative. Moral laws, such as “thou shalt not kill” or “thou shalt not steal,” are quali-tative; there is no moral law which says that “thou shalt not steal more than 62 percent of the time.” So, if people are being exhorted to save more and consume less as a moral doctrine, the moralist is required to come up with some quantitative opti-mum, such as: when specifically, is saving too low, and when is it too high? Vague exhortations to save more make little moral or economic sense.
But the lamenters do have an important point. For there are an enormous number of government measures which cripple and greatly lower savings, and add to consumption in society. In many ways, government steps in, employs many instruments of coercion, and skews the voluntary choices of society away from saving and investment and toward consumption.
Our complainers about saving don’t always say what, beyond exhortation, they think should be done about the situa-tion. Left-liberals call for more governmental “investment” or higher taxes so as to reduce the government deficit, which they assert is “dissaving.” But one thing which the government can legitimately do is simply get rid of its own coercive influence in favor of consumption and against saving and investment. In this way, the voluntary time preferences and choices of individuals would be liberated, instead of overridden, by government.
The Bush administration began eliminating some of the coercive anti-saving measures that had been imposed by the so-called Tax Reform Act of 1986. One was the abolition of tax-deduction for IRAs, which wiped out an important category of
Making Economic Sense 39
middle-class saving and investment; another was the steep increase in the capital gains tax, which is a confiscation of savings, and—to the extent that capital gains are not indexed for infla-tion—a direct confiscation of accumulated wealth.
But this is only the tip of the iceberg. To say that only gov-ernment deficits are “dis-saving” is to imply that higher taxes increase social savings and investment. Actually, while the national income statistics assume that all government spending except welfare payments are “investment,” the truth is precisely the opposite.
All business spending is investment because it goes toward increasing the production of goods that will eventually be sold to consumers. But government spending is simply consumer spending for the benefit of the income, and for the whims and values, of government’s politicians and bureaucrats. Taxation and government spending siphon social resources away from productive consumers who earn the money they receive, and away from their private consumption and saving, and toward consumption expenditure by unproductive politicians, bureau-crats, and their followers and subsidies.
Yes, there is certainly too little saving and investment in the United States, as a result of which the U.S. standard of living per person is scarcely higher than it was in the early 1970s. But the problem is not that individuals and families are somehow failing their responsibilities by consuming too much and saving too little, as most of the complainers contend. The problem is not in ourselves the American public, but in our overlords.
All government taxation and spending diminishes saving and consumption by genuine producers, for the benefit of a par-asitic burden of consumption spending by non-producers. Restoring tax deductions and repealing—not just lowering—the capital gains tax, would be most welcome, but they would only scratch the surface.
What is really needed is a drastic reduction of all govern-ment taxation and spending, state, local, and federal, across the board. The lifting of that enormous parasitic burden would
40 Making Economic Sense
bring about great increases in the standard of living of all pro-ductive Americans, in the short-run as well as in the future. Z
A WALK ON THE SUPPLY SIDE
stablishment historians of economic thought—they of the Smith-Marx-Marshall variety—have a compelling need to end their saga with a chapter on the latest Great Man, the lat-est savior and final culmination of economic science. The last consensus choice was, of course, John Maynard Keynes, but his General Theory is now a half-century old, and economists have for some time been looking around for a new candidate for that
For a while, Joseph Schumpeter had a brief run, but his problem was that his work was largely written before the Gen-eral Theory. Milton Friedman and monetarism lasted a bit longer, but suffered from two grave defects: (1) the lack of any-thing resembling a great, integrative work; and (2) the fact that monetarism and Chicago School Economics is really only a gloss on theories that had been hammered out before the Key-nesian Era by Irving Fisher and by Frank Knight and his col-leagues at the University of Chicago.
Was there nothing new to write about since Keynes?
Since the mid-1970s, a school of thought has made its mark that at least gives the impression of something brand new. And since economists, like the Supreme Court, follow the election returns, “supply-side economics” has become noteworthy.
Supply-side economics has been hampered among students of contemporary economics in lacking anything like a grand treatise, or even a single major leader, and there is scarcely una-nimity among its practitioners. But it has been able to take
First published in October 1984.
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