Saturday, January 24, 2009

Spending vs. Saving: Washington's attempt to cure a Hangover with more Booze




The current economic recovery proposal before Congress is a mixed bag, and attempts to use Reagan's formula: marry Supply-Side tools (which appeals to Republicans) with Fiscal Policy Tools (appealing to Democrats) in order to forge a grand coalition to pass the legislation.

Fiscal Policy liberals have traditionally relied on spending borrowed government money like a drunken sailor. The idea is that if the government spends money on projects, it will employ people, putting money into their hands, and enabling them to purchase goods...which in turns increases factory orders, and increases employment. The problem with this, of course, is that when government borrows money, it borrows from HUGE institutions that have HUGE amounts of dollars to lend: Credit Suisse, Lloyds of London, China, the House of Saud, and other wealty entities. As American citizens pay the interest on these borrowed funds (now amounting to 20 to 25 cents per tax dollar paid), we transfer our wealth from the American citizens to these huge institutions.

Supply Siders have traditionally felt that the way to stimulate the economy is to help businesses directly, the notion being that these businesses can then afford to hire people, pay them, and kick-start the economy from the business side.

Thus, investing in infrastructure improvements appeals to both sides: Fiscal Dems love spending money on projects, and Supply Side Reps like making the transportation of goods and services less expensive for business. Hence, Obama's initiative in investing in Infrastructure.

Meanwhile, both sides are negotiating tax cuts, tax rebates, and money giveaways for consumers and small businesses.

Now...I am 100% in favor of tax cuts, too. But the problem here is that Washington is favoring tax cuts for all the wrong reasons.

Current thought is that if "the people" have more of their own money, they will spend it freely, thus stimulating the economy. But this is like attempting to cure a hangover by encouraging the drunk to drink more alcohol: yes, it may deaden the pain, but it doesnt cure the problem, and in fact, only makes it worse.

For years, "savings" has been a dirty word to Fiscal Keynesians. In fact, in economic jargon, they call savings "leakage," because it represents buying power that 'leaks' from the economy.

Let me suggest that one of the root causes of our current problems is the attitude that consumers must buy more, more, more and not save.

Consumers, with the encouragement of Washington politicians and the Federal Reserve, have purchased homes and cars on credit, with reckless disregard to their ability to repay. During the recent credit crunch, a spokesman for Detroit actually cried, "People can't get loans to finance cars!"

And just when did the ability to get a loan become an inalienable right?!

People have bought beyond their means, used credit unwisely, and bought into the 'buy-buy-buy' notion. The average American now spends more than they earn each year.

Yes, we are in a recession. Yes, it is deep, and will get deeper still. Yes, it's going to hurt. But it's not unprecedented: we have had 26 recessions in the last 150years. It is a naural downturn in the business cycle. Rather than insisting that Americans continue to drink at the well of non-stop consumption, it is time for us to bear the hangover and come out stronger.

It is time to begin saving again for our futures.
Time to increase pre-tax 401 K contribution limits.
Time to make Pre-Tax Medical Savings Accounts available to ALL Americans, not just the self-employed and government workers;
Time to value savings and individual nest-eggs over constantly spending and then asking the government for help when the funds run out.

3 comments:

Marc said...

Thom, very 1970's background! Have you been to a disco lately? I agree with most of what you said, but is now the time to 'leak' money out of the general economy and into savings? I don't mean to propose reckless personal spending, but how would this affect the recovery?

Thom said...

We can do it one of two ways:

We can allow government to borrow funds (thus incurring more debt, and eating away at the tax money we DO pay), and buy bank's bad debt, thus providing banks of THEIR CHOOSING with extra cash for lending;

OR,

We can encourage individuals to save their own funds, and deposit them in banks of THEIR choice, thus rewarding conscientious local banks AND providing credit for responsible lending.

It's not going to be quick, plainless, or easy. But - just like revamping social security or medical insurance - it must happen.

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