The Assault on Saving

0:00This is Jeffrey Tucker. I'm here with another segment of our systematic walkthrough economics in one lesson, chapter by chapter. And now we're on the very last chapter, which is saving, Chapter on Saving, which is packed with information that's relevant to today's economic situations. And I have with me Roger Garrison at Auburn University, our expert on business cycle and macroeconomics generally. Roger Garrison. Glad to talk about his book. Okay. Tell me about his chapter on saving.

0:47Perhaps you can begin with where we were in 1946 when he wrote this and why he wrote it. It's a great chapter. He talks about saving as sort of the essence of the problem of the economic thinking of the time. He doesn't mention John Maynard Keynes even once in that chapter. He mentions very few names, but of course that's who he's talking about. Keynes was against saving because he thought it was spending that got his prosperity. And Hazlitt was there to show us that saving just shows up as spending in another form and a more socially useful form at that. It seems strange that it would even be a controversy at all to say that saving is actually a good thing, since from an individual point of view, it's always a good thing.

1:33In fact, doesn't he tell something of a story that relates macroeconomics to individual saving? Yes, yes, the two brothers each inherited a good sum of money, and one spends it on consumption, the other one spends very little and saves. and the popular view is that the one that spends is helping the community by creating jobs but Haslett's point of course is the one that saves is helping the community more by funneling the savings through investment and increased growth in the economy and increased output in the future. And this again returns to his theme of what is seen and unseen. That's right, that's right. It also Also what's involved here is the issue of whether the markets work or not.

2:21The economist, Keynes in particular, who argued that spending is good and saving is bad, they argued that partly because they didn't think the market could transform saving into investment. And Hazlitt is just right on when he brings in the interest rate and identifies that as is the market mechanism as the relevant price that translates saving into investment. The interest rate adjusts so that however much is saved is borrowed by the business community and spent on investment projects creating output for the future. This error that consumption is the reason for economic growth is still pervasive, isn't it?

3:06It is, it is, and it shows up with these throat clearing remarks on the news about consumption is 70% of the economy or whatever the current percentage is, as if that's what we need to pay attention to because that's what drives the economy. It also goes back to Cain's view that all of the macro magnitudes move up and down together, And so if you want to get the economy as a whole, output as a whole to move up and down, well, work on consumption. That's the biggest component, get it to move up. And that's because Keynes wasn't thinking in terms of inter-temporal coordination of economic forces. That's right. His level of aggregation in his theory didn't allow him to deal with that issue at all.

3:53And so consumption is now, saving is in the future. And what comes out, so anything we consume now comes out of the future. That's the idea. And this model wasn't part of his thinking at all. Everything was simultaneous. Right. Well, actually according to Cain, saving was just a leakage from the system. It even shows up in the early textbooks, in Samuelson's textbook, for instance, as a hydraulic device that has a leak. And what's leaking out is called saving. It doesn't go anywhere. It And it doesn't help the economy. But again, it's the breakdown of the market, in Cain's view, that gave him that result. He didn't think the interest rate functioned to coordinate saving and investment. And we still see, I guess in 1946, there were attacks on hoarding.

4:41That's right. Especially in wartime. I can't imagine what people must have been going through. That's right. That would be the first impulse, would be to, if you get something, hold it. That's right, yeah. In some marketing conditions, there's good reason to hoard. Although hoarding is a pejorative term. A member of Murray Rothbard used to define hoarding as you holding more money than I think you ought to hold. But everybody holds money and they make their own choices about how much of it to hold. Hazlitt indicates that hoarding is rarely the root problem of any macroeconomic problem or any macroeconomic situation. It may well be that some people hoard more than others and that people and the whole hoard more at some times than others.

5:27But typically if it's a problem, it's triggered by some policy perversity that gave rise to it. Do you increase in uncertainty and risk, and people respond? Sure. And of course you never hold just to hold things forever, you hold the intention to eventually consume in any case. That's right. The same thing for savings, by the way, that the savings is treated as just a dead end. Even in modern macroeconomic theory, it's pretty much a dead end. In the classroom, I like to use the expression, saving up for something, as opposed to simply saving, to emphasize that people are building up purchasing power in order to exercise it sometime in the future. Now, this war on saving that Hazlitt seems to identify, it's been rather effective, hasn't it?

6:13Yes, yes. I think it has. The lesson is well-learned in that book, in that savings does make its way into investment, and it does give rise to economic growth. And what's happened to savings over the years, and what's happening to savings right now? Savings in this country right now is at an all-time low. The statistics on saving out of income, as they express it, is essentially zero. That doesn't mean that nobody saves. It just means that a lot of people are spending more than they're earning, and in large part by second mortgages, by mortgaging the house and spending out of that.

7:00And so, if you look at total spending, it's about equal to total income, which means no saving out of income. Now, if I make some money and go and spend it on stocks, is that saving or consumption? Well, buying the stocks is saving. And then what the firm does with the funds, the firm that sold the stock, what they do with the funds is called investment. They buy plant equipment, tools and machinery, capital goods to increase future output. So as people pull money out of the stock market, presumably that seems to be the trend right now, and put it into, what, some other riskless investment like government bonds, is that a tendency towards greater saving or is it completely neutral?

7:51Well, that's still saving. It's not such a hopeful saving if it's being channeled into the government rather than in the private sector. But certainly in the statistics, if you look at statistics on saving, it doesn't distinguish between how much of that saving is borrowed by firms and how much is borrowed by the government. Although we know that if the government borrows a hefty dose of it, that crowds out, that's the common term, it crowds out private sector activity, and you end up with a less productive use of the saving. In an ideal world, well let me just ask it this way, can you imagine a world in which there would be no such thing as bonds such as government bonds that have absolutely no risk premium, that have a fixed return on them?

8:39Is that a world that you think we could live in? I don't think there's a world that could exist, and in fact, even with government bonds, it's not that there's no risk, it's just that the risk isn't born by the people holding the bonds. The risk is born, it's as if it was shunted into the Atlantic Ocean, but of course it isn't. It's shunted onto the rest of us, who are responsible for cleaning up the mess once things get all fouled up. and this relates to the business cycle which I think has it very cleverly or maybe it wasn't clever it was just the way his narrative works but in this chapter he discusses the cause of the business cycle. He does and you can tell the whole story of the business cycle just by focusing on that loan market.

9:30If the interest rate is telling the truth, in other words if it's actually reflecting people's willingness to save, then the economic growth we get is sustainable, it's healthy Growth, and it's all good. But if the interest rate is distorted, in other words, is made to tell a lie, and is too low, then the economy is set off on an unsustainable growth path, and eventually it all comes undone. That's the bust phase of the cycle. Does Hazlett use the phrase forced saving here? I don't think he does. The concept is there, for sure. The term itself has been used in Hayek used to mean many different things, even among the Austrian economist. It's not surprising that Hazlitt, who has a reputation for being such a clear writer, and that's one of the things that characterize this book, would avoid that term, not because he disagrees with the concept, but because there are clearer ways of expressing the ideas, which he does very nicely. You might say rather

10:34illusory saving or imaginary saving, or how would you put it? Well, Hayek called it a policy-induced investment, policy-induced capital accumulation. In other words, what's called for saving is really a form of investment, it's committing resources to early stages of production that can't be completed because there's no genuine saving to see them through the process. So what you're speaking about is a pure model of an Austrian business cycle, but every business cycle is different, right? Yes. So you can't expect the same features from everyone. That's true. In fact, what tends to happen is that business cycles tend to ride piggyback on whatever happens to be going on at the time.

11:26And here we can see similarity and differences between current situation and earlier situations. For instance, in the 1920s, there were technological innovations, mass production of automobiles in the chemical industry and in processed food because of electrification and all that, and the artificially low interest rate just caused an increase there beyond what could actually be sustained, so you got a boom of that sort. In the 1990s, you had a digital revolution going on, a genuine digital revolution. But the lower interest rate under the Clinton administration just magnified that beyond what could be sustained.

12:13And so now we have a similar thing. The difference is that it's not something that's going on in the market that got amplified, but some policy perversity, namely subsidizing home ownership, which was a perversity in in and of itself, but it got even amplified further by the increase in the money supply and the low interest rate. Well, you know, I think that's an excellent insight, and it helps account for this point that the new credit, that the business cycle sort of piggybacks on what happens to be going on in the past. That's true. And that's what makes them different. Okay. And that's partially what accounts for the theory that the cause of the business cycle is some sort of technological shock. Right. That's also an illusion, isn't it? because it's confusing cause and effect, or it's misidentifying the causal factors.

13:03That's true. That's true. And it also derives from the fact that the Federal Reserve adopts this real bills doctrine, which suggests that they supply credit at currently available interest rates, which essentially causes them to pump money into credit markets when there's There's an increased demand for credit rather than let the interest rate adjust to that new market condition. Is there any way to know for sure whether or not the interest rate that the Fed is seeking to achieve is the correct one or not? No, actually there isn't. But that's not at all surprising. In the same sense, there would have been no way in the Soviet Union to figure out what the price of shoes ought to be if only the government is creating shoes.

13:54You need a market to tell you what the price of shoes would be, and you need a decentralized banking system to tell you what the interest rate should be. So your proposal then isn't for the Fed to do a better job at what it does, it's to have it stop doing what it's doing and not to market. We need decentralized banking. And this is a position that endorses or not? He doesn't get into that. He doesn't get into that. The spirit of Hazlitt suggested he well-mind. Very good. Well, thank you very much, Dr. Garrison.