Chapter 23: The Assault on Saving
The LORD shall open unto thee his good treasure, the heaven to give the rain unto thy land in his season, and to bless all the work of thine hand: and thou shalt lend unto many nations, and thou shalt not borrow (Deuteronomy 28:12).There are two passages in the Bible that present the fundamental principles of economic growth: Leviticus 26 and Deuteronomy 28. They are parallel passages. They present a series of sanctions. The sanctions are mainly economic. About one-quarter are positive sanctions. Three-quarters are negative. They are covenant sanctions. They have to do with obedience and disobedience to God's laws. Hence, they are both judicial and ethical. They make it clear that economic theory must be seen in terms of ethics. They teach that economic theory cannot be ethically neutral. Good economic results are the product of good economic behavior.He shall lend to thee, and thou shalt not lend to him: he shall be the head, and thou shalt be the tail (Deuteronomy 28:44).
These two verses contrast the two systems of sanctions. The first appears in the section on positive sanctions. It promises success through lending. Lending is part of a program of wealth accumulation. It begins with agriculture. Good crops depend on rain. But this is only one aspect of national wealth. The net productivity will affect the whole range of economic endeavors. This includes money lending. The sign of economic success is the capital required to become a lender. Such capital is a mark of a successful person who is following a successful program. So, when it comes to success, being a creditor is a worthy goal. Avoiding debt is also a worthy goal.
In contrast is the second sanction. It is the reverse of the positive sanction. In this case, the cursed man is the debtor. But he is not the foreigner. The foreigner is in a position of authority. The mark of success is to be the head. The mark of failure is to be the tail. Half a millennium later, Solomon wrote: "The rich ruleth over the poor, and the borrower is servant to the lender" (Proverbs 22:7).
Because of the myth of economic neutrality, we find that most economists today praise both debt and credit. Are they not both legitimate economic ends? Are they both not goals of human action? Are they not different aspects of the same voluntary transaction? Therefore, are they not marks of a free society? They are marks of a free society, but they are not equal. He who lends is extending the influence of his worldview. He who borrows is subordinating himself to the creditor's worldview. While both lending and borrowing should be legal, he who pursues consumer debt is clearly a fool. This places him in the category of a covenant-breaker. He places himself in the category of "losers in history": functionally subordinate to another man's god.
This outlook is at war with modern economics. Modern economics is officially neutral methodologically. The Bible is not. The Bible praises thrift and curses debt. It makes it clear that thrift is a moral good. Debt is evidence of a moral weakness: a concern with present consumption at the expense of economic independence.
This is not a criticism of debt that finances a program of capital accumulation, such as investing in real estate. But it warns the entrepreneur that such a debt-funded business venture is risky. The person who collateralizes his capital may lose it. A businessman may take a loan, but if the bank refuses to renew it, he may lose his business. He is the servant to the lender.
So, the Bible makes it clear: it is a moral obligation to lend. This is an affirmation of a program of saving. Why? Because of the biblical concept of redemption. To redeem means to buy back. Christianity preaches that Jesus Christ came to redeem His people. How? By living a perfect life, and then dying as a substitutionary payment to God: His death for His people's otherwise mandatory eternal death. But this was preliminary to comprehensive redemption: buying back a fallen world for His people. His people will inherit the earth. This is stated repeatedly in the Psalms. "His soul shall dwell at ease; and his seed shall inherit the earth" (Psalms 25:13). But the means of this program of redemption is through service, not military conquest. Jesus said:
But Jesus called them unto him, and said, Ye know that the princes of the Gentiles exercise dominion over them, and they that are great exercise authority upon them. But it shall not be so among you: but whosoever will be great among you, let him be your minister; And whosoever will be chief among you, let him be your servant (Matthew 20:25-27).
Lending money to people who want to buy consumer goods is part of this program of redemption. Lending brings present-oriented consumers under the influence of future-oriented lenders. This means that one of the goals of lending -- a form of thrift -- is to permanently consume less that you save. Saving is part of a program of cultural dominion. It is to extend the kingdom of God by means of a lifetime of thrift, including money-lending. This means that thrift is not only for future consumption. It is for future dominion.
Adam Smith wrote this: "Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it." The goal of production is indeed consumption, but not for the producer. For the Christian, production should be seen as God's mandated means to a series of mandated ends. One of these ends is capital accumulation, not for the purpose of consumption, but for dominion. The very rich understand this. A multimillionaire or a billionaire does not sacrifice his life to make another million dollars in order to spend it on more consumption. He does it to extend his influence.
It is the supreme economic mark of covenantal rebellion in both modern economic theory and policy that government debt is praised as an aspect of wise fiscal policy. Only slightly less perverse is the suggestion that consumer debt is positive because it stimulates production. This is what is known as demand-side economics. It is the essence of Keynesianism. Keynes recommended government deficits as a way to produce national wealth.
At the beginning of chapter 16 of Keynes' General Theory of Employment, Interest, and Money (1936), Keynes wrote what has become a legendary critique of saving. He argued as follows: because saving is no guarantee of future consumption, the act of saving reduces present employment. It reduces present demand for goods, and therefore it hampers the economy. If this were a general principle, then it would mean that, throughout history, saving has been a liability, and it has retarded economic growth.
An act of individual saving means--so to speak--a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day's dinner without stimulating the business of making ready for some future act of consumption is not a substitution of future consumption-demand for present consumption-demand, -- it is a net diminution of such demand. . . . If saving consisted not merely in abstaining from present consumption but in placing simultaneously a specified order for future consumption, the effect might indeed be different. For in that case the expectation of some future yield from investment would be improved, and the resources released from preparing for present consumption could be turned over to preparing for the future consumption (pp. 210-11).
While Hazlitt did not quote this passage explicitly, his chapter was written to counter the policy implications of this passage. This passage, perhaps more than any other passage in Keynes' work, is the foundation of the fundamental errors of Keynesianism in general. It is Keynes' intense hostility to saving, and his call for government expenditures in a time of economic depression to offset the employment-destroying effects of saving, that are the heart of the Keynesian system.
One owner is the owner of money. He can spend it on consumption. He can also spend it on a tool of production. He can lend it to someone who also can either buy consumer goods or buy tools. The owner even has the right to hoard his money.
A second owner is the owner of a credit score high enough to enable him to secure a loan. His credit rating is a form of personal capital. The higher his rating, the greater the value of his personal capital. But this capital can be used to obtain a consumer loan (higher interest) or a producer loan (lower interest).
Then there are the owners of raw materials, tools, land, consumer goods, and labor services. They want to sell these various forms of property.
The window is all of the capital markets and all of the consumer goods markets. These markets serve buyers and sellers. Someone with money can spend it in any of these markets. There are sellers who are happy to make a sale, at least at retail prices. These sellers compete for the money that money owners have to spend.
Sellers of consumption goods make their case: "Enjoy what I have to sell. You deserve it. You've worked hard for your money. You only go around once in life. You can't take it with you." Sellers of capital make their case: "Save for a rainy day. You never know what will happen next. Look to the future. You want a comfortable retirement. Think about college for your kids." Sellers of charitable programs make their case: "You can save a life. You can change the world. You can feel better about yourself. Wealth has its responsibilities."
Nobody says this: "Go to the bank and withdraw currency. Hide it in a safe place." In any case, someone with $250,000 or more can't do this without violating some law or drawing attention to himself.
The person who has money in the bank is lending it. The bank has invested those digital currency units. The money is not idle. Someone will be receiving money. This money will be used to buy things. These purchases keep the economy running smoothly. People with money change their budgets from time to time, but all of the money available to them is being put to what owners regard as productive uses.
If he transfers his digital money to a seller of goods or services, the recipient will put the money to use. How? By either keeping it in his bank or by spending it on whatever he needs to keep his operation running.
If the person withdraws currency and hides it, this will have no measurable effect. No one will notice. Anyway, he hopes so. Even if millions of bank depositors did this, consumers would benefit. Sellers would have to lower their prices. Sellers do not like this, but consumers do. When you go to an auction to buy something, you want to see a sparse crowd. The auctioneer will be unhappy, but you will not be.
Keynes' discussion of saving as a cause of reduced consumption and therefore economic stagnation ignored Bastiat's analysis. Keynes failed to consider the uses to which saved money would be put in the private sector. The money might be loaned or invested in businesses that organized resources for future output. This would increase future consumption. But it would also be used for present consumption. Employees hired by these firms would receive wages. The other use for invested money was lending to consumers, who would use this money to buy goods and services. Thus, Keynes' concern about saving as a source of reduced demand was an error. Analytically, it is the central error of Keynesianism. Yet it is rarely mentioned, even by critics of Keynesianism. This reveals the extent to which mainstream economics rests on a complete misunderstanding of economic cause and effect. From 1936 until the present, Keynesian economists have had a free ride. But free rides, like free lunches, are mythical. Someone pays for them.
Politicians are pressured during a recession to spend money on various projects. There are relief projects: free money for unemployed workers, or low-interest loans for businesses. The latter payments are not regarded as relief, but they are. They involve getting something for nothing.
Keynesian economists constantly cry out for more government spending. The government has the ability to "get the economy rolling again," the politicians are told. So are the voters. The solution to the recession is government spending on anything. Keynes used this example.
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." (General Theory, p. 129)First, it costs money to fill the bottles. Second, someone must be hired to hide the bottles in the mine. Third, someone must be hired to dig up the bottles. Fourth, someone would spend the money. For efficiency's sake, modern governments skip the bottles and the money. They just spend the money on what President Obama said were "shovel-ready projects." He was wrong. Few jobs were created by this welfare program. But the money was spent.
But the money would have been spent anyway. If the central bank created the money out of nothing by purchasing Treasury debt, the money would have been spent. Anyway, this would have been the case prior to December 2008. When the Federal Reserve began offering a tiny amount of interest on excess reserves (0.5% per annum), commercial banks have sent lots of their deposit money to the Federal Reserve, which then to spend it by purchasing Treasury debt. This kept the Federal Reserve's policies of hyperinflation of the monetary base from $900 billion to $4.2 trillion in six years from becoming money. Consumer prices barely rose.
There is the general cost: the disrupting effects of the state's entering the capital markets. The politicians want to spend the money on projects they think will gain a net increase in votes at the next election. So, they can raises taxes, borrow money, or have the central bank print it. In a recession, politicians are afraid to raise taxes. So, they usually resort to borrowing and monetary inflation.
If they borrow from investors, this shifts money out of those investment categories that the investors previously preferred. The money goes into spending categories that politicians prefer. So, there will be a different set of beneficiaries. This process transfers money out of the private sector and into the coffers of the government. Then the money gets spent.
These costs are associated with the reduction of productivity that results from the re-allocated money. If government bureaucrats spend the money, those groups that receive the money are benefited. Those groups that do not get the money are harmed. But members of these groups do not "follow the money." They do not perceive that the beneficiaries of a government spending program benefit at the expense of members of groups that would have sold something to the original investors, who instead turned their money over to the Treasury.
Investors who turn over the use of their money to businesses that produce for future customers are providing the means of future consumption. They trust the judgment of the business managers who make the decisions about the goods and services that future consumers will be willing and able to to pay for. These business managers are specialists in making these estimates. They are under the restraints of accounting: profit or loss. Their success rests on their accurate forecasting and appropriate strategies of production.
Other investors turn over their money to the government, which will be used to buy votes. The politicians will battle politically over the budget. The outcome of these battles will determine which of the favored groups get access to the money.
The government will spend all of it. Then future politicians will decide what to do to repay investors: (1) raise taxes, (2) borrow more money, (3) sell IOU's to the central bank, which will create the money out of nothing.
Government spending of borrowed money reduces economic growth. That is to say, it reduces the supply of future goods and services.
Private spending of borrowed money may increase economic growth if it is borrowed by businesses that sell to consumers. Or it may be borrowed by consumers, who then spend it. If they buy consumer goods, the money goes to sellers who specialize in production. Some of the profits they make will be re-invested in the seller's business, or used in the name of the business to benefit investors.
When a civil government increases its percentage of the nation's borrowed money, this reduces the rate of economic growth. It also increases the government's debt. In terms of Keynes' original theory, the government will pay off part of this debt in boom times, and increase debt in recessions. In operation, the debt almost always rises. The only school of economic opinion that opposes the increase of government debt, and which advises the repayment of borrowed money through constant budget surpluses, is the Austrian School. In the history of the United States, the government has been debt-free in only one fiscal year: 1836.
By redirecting their capital from output-increasing enterprises to governments, investors have lowered economic growth. This has reduced the wealth of every Western nation. Median household income in the United States stagnated after 1973, after 25 years of high growth. Economists debate over the causes of this slowdown. Non-Keynesian economists would look carefully at the evidence of the increase in government debt as a factor.
Most national governments increase their debt every year. Most of them have debts owed to investors in the range of 100% of the nation's annual production. Some are three times national production.
This attitude toward debt has trickled down to the citizens. They are also heavily indebted. But because they must make monthly payments on their debt, the percent of their after-tax income that goes for debt servicing is quite constant. In the United States, household debt servicing varies from about 15% of after-tax income to 18%. Corporate debt has also increased. The combined debts of the national government, regional governments, businesses, and households sometimes reach four to five times the total income of a nation.
When combined with the unfunded liabilities of government-funded retirement programs and government-funded programs of health care for the aged, the level of national government debt is many times the official figure. Some estimates of the present value of unfunded liabilities of the United States government for these two programs are in the range of $200 trillion. Compared to the official debt of about $19 trillion (2016), the official debt is minimal. There will be a default at some point. As to which kinds of debt and which creditors are sacrificed, we can only guess. But default is inevitable. This will have negative political, social, and economic consequences.
Keynesian economics reinforced politicians' spending preferences in raising the level of government debt after 1945. Hazlitt recognized this shift in opinion years before he wrote Economics in One Lesson.
Increased debt has made economies more vulnerable to recessions. Debt obligations remain in good times and bad times. When governments, businesses, and households use the rising income during boom times to increase their debts, the bust times create financial hardships. There is a debt ratchet phenomenon all over the world. The threat of bankruptcies in the next recession has increased. This is called debt de-leveraging. People who have budgeted for income in their retirement will be startled to learn that bankruptcies of pension plans will cut into their expected income.
More important than this is a shift of attitude toward debt. The willingness to sacrifice present consumption for the sake of investing is the mark of a future-oriented person. This is a good way to define "upper class." These people value the future more than their middle-class and lower-class peers do. We have seen a shift over the last two generations in the direction of lower-class attitudes.
Consumers have concluded that it is easier to succumb to the lure of present consumption than to remain debt-free. This is the loser's mentality, according to Deuteronomy 28:44. Christians should avoid this mentality. It rests on bad theology.
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