Friday, October 21, 2011

Why Saving Is Good (For Everyone but the Saver) Pt 2

The argument made by many of those on the left is that because saving money does not directly create value and spending does directly create value, in order to stimulate economic growth, the government should tax those likely to save and subsidize those likely to spend.   The worst perpetrators of this fallacy, in addition to the president and Democrats in Congress, are the former economist and current NYT blogger, Paul Krugman and Hilary Clinton’s college boyfriend, Robert Reich.  In my last post, I showed how saving does actually create a net benefit to society, and that taxing savers therefore makes no sense. 

But I did not address whether or not spenders should be subsidized.  So, let’s go back to the deserted island I mentioned in the last post to see why redistributive programs like unemployment benefits and food stamps are not economically stimulative.

If you remember, a small group of people—Bob, Alex, Jill and Rita—were unfortunate enough to become stranded by themselves on a deserted island.  They all divided up the duties for survival—Rita collected the water, Bob hunted for food, Jill built the shelter and Alex made the fire—and they all shared the benefits by drinking water, eating food, sleeping under the shelter and getting warmth from the fire.

Rita decided to become a “saver”—i.e. producing more than she consumed.  As a result, everyone was better off.  But let’s see if the demand-side idea to stimulate growth makes everyone else better off, too. 

Imagine Bob, the hunter, falls and breaks his ankle while chasing a wild boar.  He can no longer hunt (or produce anything) and has to lie on the beach all day and wait for his ankle to heal.  The group, being compassionate, implements the equivalent of unemployment benefits for Bob—they let him continue being a consumer without being a producer. 

Now, in this situation, no one would say that the group letting Bob starve to death would be okay.  In the real world, the same is true.  No one wants to see people who are put out of work for whatever reason homeless and starving in the streets.  We may debate whether these people should be wards of the federal government or of their friends, families and local charities, but we all recognize that people can’t be abandoned when they fall on hard times. 

But I am not addressing the morality or immorality of such programs here.  I am addressing whether or not they are economically beneficial—that is, whether or not redistributive programs stimulate or stall economic growth.  That is, we are looking at what the effect will be on the group, not on just the individual. 

So, what happens when Bob becomes a “ward”?  Well, because the resources are limited, everyone else has less.  Rita, Jill and Alex all have to hunt, now, in addition to their original responsibilities.  Bob being a consumer and not a producer is the opposite of Rita being a producer and not a consumer.  Bob’s consumption drives up the amount that must be produced and it drives down what each member of the group can consume individually. 

What happens if Bob does not become a ward and the group chooses not to subsidize him?  Well, the group still loses Bob’s ability to hunt, but their consumption is not driven down.  They are down a producer, but not up a consumer.  Their micro-economy is worse off than if it had not lost Bob as a producer, but not as bad as if it had retained him as a consumer. 

The same is true on a larger scale.  When programs like food stamps or unemployment benefits make consumers out of nonproducers, consumption becomes more expensive for everyone else.  The gain of the beneficiaries is the loss of everyone else.  The fact that money is moving around more means absolutely nothing—scarce resources have become scarcer.  There are more buyers and the same amount of sellers—that means prices rise for all buyers. 

Again, it comes down to that piece of wisdom that Milton Friedman spent his career trying to impart to us—when dealing with government, there ain’t no such thing as a free lunch. 

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