Are we ruining the economy by saving money? 

In an otherwise thoughtful, nuanced piece on fiscal issues, Simon Johnson and James Kwak give this take in today’s New York Times on the idea of letting taxes rise with the expiration of the Bush 2001 cuts to the income tax rate:

Critics say that this amounts to increasing taxes at a time of high unemployment, and that instead the tax cuts should be extended as a stimulus measure. This overlooks the fact that tax cuts are an inefficient form of stimulus, because many people choose to save their additional income instead of spending it.

Excuse me, but what do you think people are doing with the “stimulus” money they’ve gotten so far, if they’ve gotten any? You know, that extra $17 per week that’s not being withheld form your paycheck? That pay from all of the jobs supposedly created or “saved?” People are saving it and using it to pay down debt, as any rational person would in this economic environment. They’re saving up against the possible loss of their jobs and homes, like they should have been doing all along.

The logic in the excerpt above confuses cause with effect, absurdly implying that we would do more for the economy by taking up smoking or getting our hair cut twice as often. They must view medical inflation as an economic godsend, because hey — “the more we spend, the better off we are!”

Forget about creating wealth, these guys measure success by the amount of money changing hands, which is really a symptom of a healthy economy. Their economic hero, as I believe Paul Craig Roberts once put it, is a cancer patient undergoing a costly divorce and simultaneously suing his doctors for malpractice. He creates no wealth at all, but he certainly causes a lot of spending.

On the other side of that coin, what do you think happens to your disposable income when you save it instead of spending it? If you put it in a bank or invest in a company (or among several companies), it ends up in the hands of someone who tries to use it to create new wealth by producing a good or service that people actually find worthy and want to spend money on, even in this economic environment. The successful ventures create jobs in manufacturing, retail, delivery, support, etc. They broaden the base of wage-earners who pay taxes and spend (and save) money. If there are enough of them, they reduce unemployment make each of us just a bit less scared that we’re going to be jobless any day, so that over time we all feel like we can afford to spend more again.

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Staff Report

Staff Report

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A daily newspaper covering San Francisco, San Mateo County and serving Alameda, Marin and Santa Clara counties.
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