My friend Marty has put up another post about the so-called Fair Tax. I have some sympathy with the idea, but also a great many issues with it, but I wanted to pick up on a couple of criticisms here, based on this paragraph:
Do I need a paragraph here to refute the idea that savings are bad for the economy? I hope not but here’s the summary. Capital is to a large part those things people use to be productive, buildings to work in, computers to work on, tractors for a farmer, trucks for a delivery company etc. Greater capital investment makes workers more productive. The more productive the worker the better he gets paid and the more cheaply his company can sell the good or service it produces. In order to build capital people must invest money in capital equipment. In order [to] invest money people must first save money. What drives the economy is not spending but saving. Or as someone else put it, “Savings fuels growth, entrepreneurship drives it.”
Now Marty is a sceptic about a great many things, including evolution and global warming. Given his doubts over such theories, it’s interesting that he can state “The more productive the worker the better he gets paid”, which is clearly a theory, and one that in the stated form is currently being disproved (since 2000 productivity has gone up more than inflation, whereas after inflation wages have dropped). Now it’s perhaps fair to say that “The more productive the worker the better his chance of increased pay”, but even that’s a theory not a fact.
The second issue I find even more strange. “In order [to] invest money people must first save money” is a very linear statement; first save, then invest, then boost growth, etc. In practice this is part of a cycle; yes you have to save to invest, but you can’t just decide to save, you have to have something to save. And the only ways to do that are to already have the something to save, or to generate it. Either way, at some point you must have sold something, which means somebody had to spend. Hence, I could argue, spending drives the economy.
Of course I’d be wrong. Spending can drive the economy, but only to a certain point before investment is required, which requires saving. Saving can drive the economy, but only to a certain point before that saving requires a return, which depends on spending. All the ideas for jump-starting the economy, whether it’s trickle-down, pump-priming or whatever, rely on the this elasticity; you can mess with one for a while, and hope that you’ve messed in a way that will cause the others to catch up before your purse runs dry, because there is no start to the wheel.