The Savings Bust

Originally published October 17, 1983

CONSTANT readers of this column have foreseen since THE NEW LEADER issue of March 8, 1982, what last month burst like a paper bag full of cold water over the heads of the self-assured enthusiasts for Reaganomics. The New York Times, evidently relying on Federal Reserve Board figures, announced that our national rate of saving has steadily declined in spite of the massive supply-side tax cuts that were supposed to stimulate it.

This development has caused some bewilderment. Norman B. Ture, former undersecretary of the Treasury for tax and economic affairs, who was the “architect” of the 1981 tax cut, said the news was disturbing and surprising. “It’s very difficult to understand,” he added. Other worthies were tempted to dispute the figures, for the mind-boggling reason that “they cannot show tax-evasion income” (the inference being, I suppose, that the so-called recovery has been fueled by illegal savings).

As you know, I am like Adam Smith in that I hold no brief for statistics. (One of the most successful books I ever edited was entitled How to Lie with Statistics.) It does, nevertheless, seem to me fitting that those who live by statistics should die by statistics. In the present instance, I think it as likely that the rate of saving has been overstated as the other way around; but whatever the precise figures may be, they certainly show that the tax cuts didn’t do what President Reagan promised they would do.

Nineteen months ago I told you why they wouldn’t. I wrote that unless the government is running a surplus, there is no way for tax cuts to be a direct stimulus to productive investment.“ To emphasize the point, I said it in italics, a typographical device I don’t resort to lightly.

My reasoning was as follows: “Try as he will, the supply-sider can’t get money into the hands of producers. This is not because of the conspicuous consumption of the rich or the notorious perversity of Wall Street. Even when everyone is doing his best to cooperate, the scheme can’t work. The supply-sider’s tax cuts go to the rich, all right; but the recipients have to lend the money right back to the government to cover the [increased] deficits. No more money becomes available for productive investment than there was before the game started.” I continued: “You will note that I say ‘available,’ because I don’t for a minute believe that much of that tax windfall would go into productive investment even if it could. Almost all of it is earmarked for speculation. No goods will be produced as a result of it, nor any services rendered. But the rich will be richer.”

Two months after my column appeared, the Times had a roundup of opinion on the economy, in which Professor Arthur Laffer was quoted. He was a big man in those days, with a curve named after him. The Laffer Curve, you will remember, was the principal intellectual underpinning of the Reaganomic tax cuts. Though it first appeared on a cocktail napkin and never was able to find empirical support, it was used to justify giving major tax cuts to the rich (whose incentive would otherwise be sapped). But on May 2, 1982, Laffer was quoted to the effect that the cuts would have “no economic effect” because the government would “give a dollar back and then borrow it right away from you.”

Yes, that is what I had said, and it amuses me to think Laffer might have gotten the idea from my column. That would have been sufficiently astounding. Sensationally astounding was the fact that here was one of the original supply-side gurus confessing that the scheme wouldn’t work. Laffer’s recantation was on a par with David Stockman’s confession that Reaganomics was a Trojan Horse for the rich.

Unfortunately, the Times business reporters are so used to stitching stories together out of mindless handouts, and Times readers are so used to skipping such stories that not even the Times editors noticed the recantation. In an editorial some weeks ago they still didn’t understand what had happened, attributing the fall in savings to the failure of the tax cuts to give individuals any “particular incentive” to save.

Now, in discussions like this, one can easily lose track of what the real issue is. The real issue here is not why savings have fallen but whether it makes any difference, and whether any “particular incentive” should be legislated to change the situation.

Classical economics noted that steam driven looms produced more cloth than hand looms, and were bought by men who had saved some money or could borrow the savings of others. Thus it seemed obvious that savings increased production (and so were virtuous and should be rewarded). That analysis, however, was inside out, as any moderately reflective businessman has known these past two centuries. For regardless of the savings one has accumulated, one is not well advised to buy a power loom if there is no effective demand for cloth or if the demand is already oversupplied. Of course, if there are no investment possibilities in textiles, there may be some elsewhere. But when you have 12 per cent of your labor force and 30 per cent of your industrial plant standing idle, the odds are against finding suitable places to put your savings, no matter how much you have laid by.

In this situation – which is the situation we have been in and are still in –  you can do two things with your savings: you can live it up, or you can speculate. Speculation, I’m ready to admit, is my King Charles’ head; I will therefore confine my remarks on the point to asking where you think all the billions came from that have gone into the stock market in the past 15 months.

Putting speculation aside, let’s look at living it up, otherwise known as consumption or demand. Here again, classical economics has something to say that seems plausible enough until you stop to think about it. The gimmick is Say’s Law. Jean Baptiste Say, a French contemporary of Adam Smith’s, had it figured out that production creates its own demand. He reasoned this way: If you set up a textile mill, you have to pay the people who build the factory and those who make the looms and those who raise and shear the sheep and those who run your looms. All these payments are used by these people to buy things they want or need, and the people who sell them these things use the money they are paid to buy what they want or need, and so on and on. Sooner or later, someone will buy your cloth. Or if no one does, it still happens that a lot of other goods are sold, so that, in the aggregate, production creates demand, and a universal glut is impossible.

MALTHUS, among a handful of others, saw that this is nonsense (because of the time lapses involved, if for no other reason), but he couldn’t convince his friend Ricardo or the followers of Ricardo. It took the Great Depression, when an unsalable glut existed for all to see, to exorcise the ghost of Say. And yet, only a half century later, the ghost of Say is again seen nightly on the battlements and occasionally stalking abroad in full daylight, driving Atari Democrats and self-advertised liberal businessmen mad with schemes to reduce consumption in the hope of increasing production.

A convenient example is at hand in an Op Ed page piece in the very issue of the Times that carried the story about the fall in savings. The author is one Fletcher Byrom, chairman of the Committee for Economic Development, described as “an organization of chief executive officers and university presidents.” Awesome. Byrom proclaims: “The United States needs to move away from a patchwork tax system that penalizes saving and investment toward one with more systematic emphasis on taxing consumption.” Someone should take Byrom aside and tell him about the Economic Recovery Tax Act of 1981.

He might also glance at another story in the same issue of the Times revealing that millionaires have multiplied like fruit flies even as savings have been languishing. There were about 180,000 millionaires in 1976 and 500,000 in 1981. It is not irrelevant that the great leap forward coincides with the introduction of the maxi tax on “earned” income. Goodness knows how many millionaires there are today, but I’ll bet the number has redoubled since the maxitax on unearned income went into effect two years ago. (I’ll bet the number of those below the poverty level has redoubled, too.)

If Byrom and his committee have their way, there will be still more people with millions to throw around. Their fortune-good for them but bad for the country – will be made possible by lowering the personal income tax and the corporation tax, while raising Social Security taxes and sales taxes, and maybe introducing a value-added tax, which is a semi-hidden kind of sales tax.

I am sorry, but I find it difficult to have proper respect for chief executive officers and college presidents who talk this way. The empirical evidence is plain that their policies have not done what they promised, yet they persist in them. The empirical evidence is plain as well that their policies have caused appalling suffering, not only in this country but throughout the world. Nonetheless, they persist. Although I find it hard to have proper respect for these people, I’m scared that they will continue to have their way.

The New Leader

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