How one Labour blogger hopes to destroy production and slash real wages

Economic ignorance rears its head again at Labour blog Red Alert this morning.  Someone called David Clark* writes:

Our economy is stagnant under National… It doesn’t have to be this way…For starters, National passed over a huge opportunity to stimulate the economy.  The latest Treasury figures estimate the cost of income tax cuts made by the National Government in 2010 at around $11 or $12 Billion.

Leave aside for the moment both the numbers involved, the sad fact the GST hike fully balanced out the tax cut for most people, and the inanity of referring to people keeping some of their own money as a “cost.”

But this Mr Clark writes as a Keynesian, under whose theories a tax cut is recognised as one classic form of stimulus—especially when accompanied by hefty borrowing, which this “tax cut” was.  So why is he decrying this as not stimulus? Perhaps he just hasn’t read his Keynesian script properly himself, because he then waffles on for a while about how high-earners spend less of their income than low-earners—typical Keynesian claptrap—before using alleged economist Joseph Stiglitz to illustrate this point:

“Consider someone like Mitt Romney, whose income in 2010 was $21.7 million. Even if Romney chose to live a much more indulgent lifestyle, he would spend only a fraction of that sum in a typical year to support himself and his wife in their several homes. But take the same amount of money and divide it among 500 people—say, in the form of jobs paying $43,400 apiece—and you’ll find that almost all of the money gets spent.

So what does he think happens to the rest of that notional $21.7 million not spent supporting “someone like Romney and his wife” in their several homes? That it gets baked into pies? Or buried in the back garden? Or rolled into doobies and smoked? No, of course not (not by Mitt Romney, anyway). No, the remainder not spent on consumer goods also gets spent—only, as with all savings, it gets spent by someone other than “Romney and his wife,” and (mostly) on things other than consumer goods.

This is a process to which Keynesians are profoundly blind: both in what happens to saving, and in where those savings are actually spent--virtually the whole of which goes to the productive part of the economy.

You see, saving is not dis-spending—it is deferred spending. Savers defer a portion of their own spending power and direct it (or have it directed for them by their bank) into investment vehicles, where it then adds to the pool of real savings from which entrepreneurs and businesses can borrow to grow their businesses.

Which means all the $21.7 million is spent just as surely if it was taken and given away to voters low-income earners. But the chief difference is that, if saved, the overwhelming majority of that $21.7 million is spent not on destructive consumption and consumer goods but on productive consumption and capital goods, i.e., on the very part of the economy that grows the economy and from which the overwhelming proportion of  wages are actually paid—and about which Keynesians like Mr Clark are virtually one-hundred percent blind. 

George Reisman illustrates this point:

The truth, which real economists, from Adam Smith to Mises, have elaborated, is that in a market economy, the wealth of the rich — of the capitalists — is overwhelmingly invested in means of production, that is, in factories, machinery and equipment, farms, mines, stores, and the like. This wealth, this capital, produces the goods which the average person buys, and as more of it is accumulated and raises the productivity of labor higher and higher, brings about a progressively larger and ever more improved supply of goods for the average person to buy.
    Thus, for example, because the automobile companies have numerous modern and efficient automobile factories, there is a production of automobiles sufficient for almost every family in the United States to own one. Because Exxon-Mobil and other oil companies own oil wells, pipelines, and refineries, there is gasoline and heating oil for the average American to buy. (And if the wealth of these companies were greater, and if its use in developing sources of supply were not blocked again and again by those who value the wildness of nature above the welfare of people, there would be a larger and more affordable supply of gasoline and heating oil to buy.)
    The capital of business firms is also the foundation of the demand for labor. The wealthier and more numerous are business firms, the greater is the demand for labor and the higher are wage rates. As illustration, just consider where it is more desirable to work: in an economy with few or no business firms or only small, impoverished business firms, or in an economy with large numbers of wealthy business firms. It is obvious whose competition for one's services will be more beneficial.
    Thus, in a market economy, people have a two-sided benefit from the capital owned by others. The capital of others is the source of the supply of the goods they buy and the source of the demand for the labor they sell. And the greater is that capital, the greater is this two-sided benefit to everyone. To the extent that the supply of goods produced is greater, prices are lower. And to the extent that the demand for labor is greater, wages are higher. Lower prices and higher wages: that is the effect of capital accumulation.
    An essential prerequisite of capital accumulation is saving.

Which is precisely what Mr Clark, whoever he is, decries.

Mind you, at least he’s arguing for tax cuts for some people, which on a Labour blog is sure going to have his head pulled in very quickly.

If the economic world really operated in accordance with the dreams of Messrs Clark, Stiglitz and Keynes, however, we would see even more penury than we do today, because if the greater part of spending was really to be spent on consumption rather than production—i.e., on consumer goods rather than capital goods—then production would fall, capital would diminish, the wage share of national income would fall, and real wages and real profits would plummet.

So be careful what you wish for, Mr Clark.

PS: You might argue that if consumers slowed their spending it wouldn’t matter how much businesses were producing because no-one would be buying what they’re selling—so that taxing business and “the rich” is “necessary” to give stimulus money to consumers.

This, too, would be profoundly blind to who actually purchases most of what businesses produce: which is other businesses, for whom savings is their primary source of spending.  Indeed, business in itself “generates a monetary demand that is fully sufficient for the profitable sale of its products.”

And to take money from businesses (or to reduce the pool of real savings, which amounts to the same thing) just in order to give to consumers the money with which to buy those same business’s products? This would be tantamount to businesses standing on the corner handing out hundred-dollar bills to passers-by in the hope they purchase eighty dollars worth of goods from them. In other words, it would be as insane as it would be destructive.

* * * *

* Oh, go on then, he’s Labour’s latest Dunedin North MP and adviser to someone called David Parker.