I’ve been fighting a battle against these ideas – the ‘paradox of thrift’ is a myth: Dr. Mark Skousen
Dr. Mark Skousen has been advocating for ‘supply-side’ economics over his entire career. He’s been a Professor at Columbia Business School, and he’s now a Presidential Fellow at Chapman University, in Orange County, California.
According to Austrian economists like Dr. Skousen, consumption and consumer spending are not the main drivers of economic growth. What really drives an economy are investments and innovation from businesses.
The stimulus plan, which was meant to send more cash into consumers’ pockets, is based on Keynesian ideas. The more people spend the better. If they save instead of spending, it will lead to a downward spiral of economic contraction.
Rick Rule, Chairman of Sprott US Holdings, recommends Dr. Skousen’s The Structure of Production as reading for aspiring investors. It argues that the economy is about producing, innovating, and re-investing – and that higher consumption is a benefit derived from the availability of goods and services.
Dr. Skousen recently shared with me his concern for the popularity of ‘false notions’ in economics, which are driving government measures that may well be harming the economy in the long term.
One the phone from his office, Dr. Skousen explained that the best way to help the economy is for businesses to do well. “If you can get companies to be more profitable, that’s the solution [to help the economy],” he said.
Why is this? First of all, you need businesses to re-invest in their production of goods and services. As he puts it, you need “constant research and development of new products.”
Without this persistant effort by companies, progress stalls. We might never have had the iPhone for instance, or we would have stayed on the original model: “Imagine where our economy would be if we had just stayed with the original iPhone or the original smartphone…. They had a very limited use.”
Since the economic crisis, getting money flowing and boosting consumer spending has been a priority.
The US, Japan, and Europe have responded to lower consumption levels by increasing the availability of credit.
The results for businesses have been mixed. We’ve seen record share prices and corporate profits of course, but these gains are concentrated in well-established companies. As Dr. Skousen points out:
“It has helped major corporations and it has helped the banks and financial institutions, insurance companies and that sort of thing more than it has helped the common citizen.”
Bigger companies are doing well overall, and this has even led to wage increases.
For instance, the lowest-paid Walmart employees recently got a raise.
But we’re also seeing new businesses struggle: “No new banks are being created. New business creation is in decline. More businesses are failing than are being created.”
The policy of keeping interest rates low harms savers, who can expect a much smaller return on their capital. For economists who believe that savings harm the economy, this is a good thing.
Robert Shiller, a Nobel prize-winning economist at Yale said recently that if everyone decided to save more it would ruin the economy.
For Dr. Skousen, this is a dangerous idea. Savings are actually better than consumer spending, he said:
“What Shiller doesn’t realize is that if you save more, that money is put to good work in research and development, in infrastructure and capital investment and in the stock market. It’s not like it goes under the mattress.
“So saving is a better form of spending than consumer spending, and it’s good for the economy.
“The ‘paradox of thrift’ (the situation described by Shiller) is one of the biggest myths in economics.”
Discouraging saving has become popular as economists worry over the possibility of deflation.
Dr. Skousen is fighting back: “I’ve been fighting a battle against this idea that consumption, consumer spending and government stimulus are what cause the economy to grow. This is very much a false notion,” he said.
One of the most well-known figures of the opposing camp — those who support stimulus and government intervention — is Nobel prize-winning Paul Krugman, of the New York Times.
He’s warned that the paradox of thrift has been a real problem since 2008. In today’s low-growth and low interest rate environment, “saving hurts the economy,” he argues1.
Dr. Skousen has invited him to Freedom Fest, an annual conference that will take place this summer in Las Vegas July 8-11. It’s the “world’s largest gathering of free minds,” says Dr. Skousen. Paul Krugman will debate Stephen Moore of the Wall Street Journal. Rick Rule will be attending as a keynote speaker.
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