Wednesday, May 22, 2013

Spending creates resources, saving destroys them

I've been seeing a number of great blog posts on the paradoxes of thrift.  I took the title of my post from the reasoning in this wonderful post by Steve Roth, who starts from the fact that Savings is not equal to Investment, as it is in the toy economic models and intuitions of many people (please read the whole thing to get the point).  One key very easy to understand part is this:

... If you forgo as massage this week, or wait a few more years to get your house painted, is the labor for that massage or paint job "saved"?  How about this year's sunlight...  Understand: services comprise 80% of US GDP. ...

I've been struggling to make these points, and more, for years.  Spending is what it's all about, without spending there is no income, no economy, and no social benefits can be ultimately delivered without spending.  Saving across the entire economy is not even necessary in a modern economy.  Saving is only a convenience facilitated by an economy and useful for personal purposes...deferred consumption, retirement and so on.  For the overall economy, saving is a drag...a drag which specifically produces unemployment.  That's why periods of de-leveraging--which is relative saving--inevitably induce unemployment.

There is no social benefit in favoring saving over spending in taxation.  If anything, it should be the reverse.  But the conflation of spending with consumption aka wasteful dissipation permits moralistic sounding politicians to serve plutocrats by giving them key tax breaks on saving, often painting them as for everyone when overall most benefit is to top incomes.  And also inducing politicians and even academics to shove down further plutocracy serving "consumption" taxes (i.e. transaction taxes).

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