One of the best analogies for describing the United States economy today was put like this:
Imagine someone who is tired and lacks the energy to function at their normal level because of too little sleep. (I think everyone on campus knows the feeling.) There are a multitude of drugs that can make him feel fully refreshed, even after a night without any sleep, and apparently capable of functioning the next day with full efficiency.
However, taking these drugs is certainly not a good idea. This is because the underlying problem of insufficient sleep is not addressed by being artificially stimulated but is actually worsened. This is because the stimulus further depletes his body’s already diminished energy reserves and takes him to complete exhaustion.
This description exactly applies to the current situation and government lies to overcome it through “fiscal policy” and “stimulus packages.” The real meaning of these terms is more government waste of our money and specifically targeted lower taxes to encourage consumption.
In particular, this includes giving income tax refunds to individuals who paid no income tax in the first place and who, because of their low income, can be counted on to rush out and buy more stuff as soon as additional funds are put in their hands.
The major and most important difference between pharmaceutical stimulants and the government’s variety is that the government spending will not succeed even in the short run. We have too many deep rooted issues that must be corrected and a temporary infusion of worthless paper dollars is not going to return us to health.
Like our zombie friend, the economy has a shortage of its most important asset. For him it’s sleep, for us it’s capital. The economic system is not functioning properly because it has lost capital. Capital is the accumulated wealth that is owned by business organizations or individuals and is used for the purpose of earning profits or interest.
In essence, capital is the foundation. Without it, the economy becomes a house of cards, and one stiff breeze can collapse it. The amount of capital in an economic system determines its ability to produce goods and services and to employ labor, and also to purchase consumer goods on credit.
The greater the capital, the greater the ability to do all these things. When there’s less capital, everyone’s ability to do any of these things is diminished.
You may be asking yourself, “So what?”
Capital is accumulated through saving. Saving does not mean not spending. Saving does not mean hoarding. It means not spending for the purpose of consumption. Abstaining from consumption spending makes possible equal spending for production, which is REAL wealth comes from.
He who saves is in a position to buy capital goods, pay workers, lend funds for purchase of expensive goods, or lend funds to others for any of these purposes.
The distinction is VERY necessary due to the utter ignorance of the subject. We have been hearing for months now about the so-called “paradox of thrift.” Almost every night on the cable news shows, there is another story about people not spending their money and therefore, hurting everyone.
The myth has been repeated ad nauseam and with such a tone that the core idea is not even up for debate. This is false and harmful. But it is what the Keynesians in government want and it makes people feel good for being foolish.
If Keynes’ model of “spending equals wealth” were true, we would NEVER see recessions or “downturns” because frankly, there will always be significant consumption.
But factors of production, the ability to start a business and pay workers, or provide the funds for another entrepreneur to do so cannot be provided for with one month’s or year’s income. It requires discipline and the accumulation of a portion of income over time.
If it were possible to purchase a car or house on my twice-monthly paycheck, I’d have property all over the East Coast and an entire fleet of vehicles. But the fact is that most spending in the economic system is built on a foundation of saving.
President Obama can hope all sort of “shovel-ready” projects into action, but by using stolen funds (i.e., the entire Federal budget) he would be better served lighting $100 bills on fire out on the South Lawn.