Monthly Archives: December 2008

The conventional view of economic growth now being discussed in the news prescribes higher consumer spending as the solution to the current economic recession.  The idea is that if people buy more big screen TV’s for Christmas, manufacturers will increase production, hire more workers, raise wages, and we’ll all live happily ever after.  As practiced in government policies, this mistaken belief is highly dangerous, and will lead to the exact opposite of its intended effects.  To explain why, I will apply my earlier principle that “same principles that apply to your personal finances… apply equally to the world at large, at all levels of economy activity” and that “political success requires advocating policies which violate these basic economic principles – and then evading the consequences of their own policies.”

First, we have to question the premise that maximizing economic growth is inherently good.  Consider the nature of a young person saving money for his future.   If all he cares only about is his income and net worth, he must spend every waking hour of his life working, advancing his career and investing everything but the bare essentials of survival.  Such a strategy will maximize present and future income at the cost of sacrificing the actual purpose of that income – to enjoy the values that his labor makes possible, including both consumer goods and time to relax and enjoy life with friends and loved ones.  If everyone employed such a strategy, our society would experience rapid economic growth – until we all dropped dead from exhaustion or depression.  In fact, social and economic progress requires that we devote some resources to long-term investments such as hobbies, art, and philosophy to develop our careers, values, and other opportunities to improve our lives.

Second, the lack of a consumer culture is not an impediment to economic growth, as resources that are not consumed are invested into new markets and improving the capital resources needed to expand future production.  If our workaholic forfeits a new car now to buy a better car at some point in the future, his savings are not lost.  Instead of being directed into present consumption, his savings become the investment capital for new factories and R&D into cheaper and better cars.  Thus is why such high economic growth is possible in “Asian tigers” such as Japan and China – high rates of savings support rapid technological progress and investment into industry at the cost of a much more frugal lifestyle than in the West.  In fact, there is a tradeoff between current consumption and the savings available to invest in future production and increased economic growth.  There is no single right answer to this tradeoff – every individual must choose for himself how to balance present spending with investing in his future.  In a free market, the sum of individual savings rates becomes the real interest rate.

Third, the consequences of artificially manipulating interest rates are disastrous.    By expanding the money supply through manipulation of interest rates or (as is happening now) sending money directly from the printing presses to banks and other corporations, the government is devaluing savings and redirecting them into increased consumer spending.  This improves the economic statistics in the short run at the cost of wiping out the resources set aside for long-term capital improvements.  For the last few decades, America’s spending binge has been funded by foreign investment and rapid technological innovation, but ultimately, unless we drastically cut our consumption, and direct our income into savings and repaying our debts, we will find our money increasingly worthless both here and internationally.  If you are wondering how bad hyperinflation could get, just look at Zimbawbe, were life expectancy has declined from 60 to 37/34, unemployment is at 80%, and as much as half the surviving population has left the country.