Life after Death
Dolors & Sense
by Sanford Rose
KISSIMMEE, FL—(Weekly Hubris)—11/22/10—Sixty-four years after his death, J.M. Keynes remains the world’s most relevant economist.
His central insight is, of course, the fallacy of thrift. That is, a private virtue can become a public vice.
Savings and investment are definitionally equal, but only, as economists say, ex post—i.e., after the fact.
What happens when savings exceed investment, ex ante—i.e., before the fact?
Income is withdrawn from circulation and, unless a compensatory fall in interest rates quickly stimulates more consumption or more investment, economic activity will decline until incomes fall sufficiently to reduce savings to the point where they once again equal investment.
This is precisely the position in which the US economy finds itself today. After a decade of saving too little, we now have reverted to saving too much.
We now save so much that the government has to try balancing the books by “dissaving”—the execrable deficit spending.
But it’s only a trial because politicians and some so-called economists are resistant to Keynes’s enduring insight.
They argue that we will go broke if the government keeps spending more than it takes in. They say that private over-borrowing got us into this mess, and public over-borrowing can’t get us out. (Actually, the initial problem, which appears to us as one of over-borrowing, was one of over-saving, but that of the Chinese, the Japanese and the Germans.)
That sounds intuitively right, but it’s wrong.
It depends on how the government spends what it borrows. If it spends the money to increase our human capital—for example, a job training corps, modeled on the Depression-era CCC—productivity and output will rise.
If real output rises fast enough, although the deficit may increase, its relative burden (share of national income) will fall. We will be better off.
In many situations, public over-borrowing is needed until consumer and producer confidence increases to the point where private over-saving stops.
Keynes taught us that 75 years ago. But we are slow learners. Time to go back to school. Dead men often tell lively tales.
Sanford Rose
Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)