An enduring myth in American politics is that wealthy people—and especially billionaires—are hoarding their money and not spending it, which somehow creates inequality and makes everyone poorer. (Of course, when billionaires do spend their money on themselves or their families, politicians like Bernie Sanders and Elizabeth Warren complain about that, too).
One pictures Scrooge McDuck swimming about in his safe full of gold coins, refusing to spend his riches, instead wallowing in greed. While the McDuck caricature is cartoonish fiction, threats by Sanders and other Democratic Party politicians against the wealthiest among us are quite real, and the calls by Democrats to confiscate much of their property are having a destructive effect upon future capital development.
However, according to Jean Chatzky in The Atlantic, the “hoarding” problem isn’t limited just to billionaires. No, it turns out that American retirees (yesterday’s Baby Boomers) are refusing to spend their retirement savings in amounts needed to “stimulate” the US economy. We have become—the horror!—Scrooge McDuck Nation. Writes Chatzky:
A landmark 2018 study by the Employee Benefit Research Institute found that the median individual with more than $500,000 in savings had, 20 years into retirement, spent just 12 percent of that sum. And a Corebridge/Greenwald Research survey of older adults with at least $100,000 showed that only 28 percent were comfortable watching their savings taper off to cover living expenses, ostensibly exactly what the money was saved for in the first place.
This is a problem—not just for retirees but for the country. Savers who forgo gratification for decades end up not enjoying the money they’ve worked so hard to set aside. Meanwhile, the U.S. economy suffers as all of that money sits under the proverbial mattress instead of being spent.
While one doubts that Bernie Sanders and Elizabeth Warren won’t be condemning the middle-class retirees for not spending their money fast enough, nonetheless, they all are falling for the same economic fallacies about the economy and what happens when people save. Unfortunately, ever since the Keynesian Revolution swept the country nearly a century ago, the US government and its partner-in-crime, the Federal Reserve System, has been doing everything it can to shake out individual savings and force people to spend now instead of accumulating wealth for the future.
One of the central fallacies in Keynesian thought is the so-called Paradox of Thrift, which Paul Krugman explains:
The story behind the paradox of thrift goes like this. Suppose a large group of people decides to save more. You might think that this would necessarily mean a rise in national savings. But if falling consumption causes the economy to fall into a recession, incomes will fall, and so will savings, other things equal. This induced fall in savings can largely or completely offset the initial rise.
This is the economic version of the “Why Study?” ditty we used to repeat when we were in school: The more you study, the more you know. The more you know, the more you forget, and the more you forget, the less you know. Therefore, the more you study, the less you know, so why study?
The Krugman explanation of the Paradox of Thrift follows the same logic as our “Why Study” limerick, except everyone knows that the more we study, the more we will know, period. There is no “Paradox of Studying.” But there is no logical “Paradox of Thrift,” either, only bad logic.
Like all good Keynesians, Krugman (and Chitzky) assumes that saving money is the equivalent of stuffing money into a mattress, where it does more harm than good. Keynesians are obsessed with the idea that unless spending on consumer goods continues at a boom pace, the economy will implode into that dark place known as the Liquidity Trap.
The idea behind it, as Krugman has expressed many times, is that spending by one person becomes someone else’s income. So, if someone spends less by withholding some of one’s income for savings, he also is lowering someone’s income—unless the savings are “spent” in the capital markets. Writes Krugman:
The story behind the paradox of thrift goes like this. Suppose a large group of people decides to save more. You might think that this would necessarily mean a rise in national savings. But if falling consumption causes the economy to fall into a recession, incomes will fall, and so will savings, other things equal. This induced fall in savings can largely or completely offset the initial rise.
Which way it goes depends on what happens to investment, since savings are always equal to investment. If the central bank can cut interest rates, investment and hence savings may rise. But if the central bank can’t cut rates — say, because they’re already zero — investment is likely to fall, not rise, because of lower capacity utilization. And this means that GDP and hence incomes have to fall so much that when people try to save more, the nation actually ends up saving less.
Thus, according to Krugman, we can save ourselves into a recession. In Krugman’s writings, one finds very little about capital and the need for real savings in order to have capital formation. Instead, it is about spending, spending, and more spending.
The Austrian School of economics sees things much differently. First, Austrians see purposeful human action as fundamental to what happens in an economy, so when they spend money, they are seeking to make themselves better off. (F.A. Hayek has a lengthy paper that deals with the so-called paradox.)
Contrast this to the Keynesian-Krugman view that the most important thing in an economy is spending, creating a circular view that goes as follows: (A) People produce goods which go on a shelf; (B) In order to clear the shelf, people must spend money; (C) The shelves are empty and now we can produce goods and keep our jobs.
In other words, we don’t spend money to purchase things we believe will improve our lives but rather spend it so that we can repeat the process of produce-spend-produce indefinitely. The economy in this example is nothing more than a big circle in which the main purpose of action is to keep moving about the circle.
Unfortunately, the circular economy is the dominant economic view among our elites and policymakers. One’s retirement savings are not ours to use or hold so we can pass them down to our children. Instead, retirees have a “duty” to spend because if they don’t spend, that produce-spend-produce circle grinds to a halt.
This is not economics. It is a merry-go-round view of what we call the economy, not an economy itself. For a journalist in an elite publication to claim that retirees are making things worse because they are not depleting their savings quickly enough to satisfy Keynesian elites is just one more proof that the ruling classes are economically illiterate.
