Capitol Ideas / The Bloomsbury Savings & Loan

...When you came right down to it, he just didn't like the idea of people saving money...

...Let us look briefly at the Keynesian model of the economy...

...Like Keynes, Mandeville argued that if everyone saved their money, consumption would drop off and pretty soon everyone would be unemployed...

...In his Essays in Persuasion (1931), written a few years earlier, Keynes put the matter as plainly as he knew how: "The best guess I can make is that when you save five shillings you put a man out of work for a day...

...You would think so...

...Inflation itself is quite enough to undermine savings...

...There were no marginal effects to worry about...

...Still, there he was on the radio saying that the nation needs to increase its savings rate...

...Equally, of course, deflation created serious problems for investors, or borrowers of money...

...And if our legislators are really serious about encouraging saving then they should also completely abolish the taxation of interest...

...You have a hundred dollars in the bank today, and a year later it will buy you $90-worth of goods...

...In addition, Alice Rivlin's absurd and disgraceful Congressional Budget Office still cranks out numbers demonstrating to unwary legislators that the economy grows faster if the government spends our money than if we do...

...Prices sank 11.2 percent in 1932, for example...

...So does Senator Pete Domenici, the chairman of the Senate Budget Committee...

...Leave the money in the bank, because next year it will buy you more...

...Imagine the old-fashioned water mill...

...Keynes seems to have made the signal mistake of believing that interest rates were low...

...In this book, Leslie Stephen wrote, "a cynical system of morality was made attractive by ingenious paradoxes...

...The "paradox of thrift" found its way into economic textbooks: What was good for the individual was likely to harm the nation...

...The value of money was increasing every year...

...The entire distinction between earned and unearned income should be abolished immediately...

...The problem is to find anyone who is against savings...

...Actually, of course, what was really needed was better government monetary policy, to end deflation...

...Money-the "income stream" -circulated around the economy in pipes, and at the central controls would sit some very important people, called economists, who would be empowered to "fine tune" the flow, either by advancing or retarding fiscal or monetary controls...

...His argument was quite ludicrous, but had the virtue of simplicity: Money saved.was money not spent, resulting in static inventories, idle factories, and workers dismissed...

...this in turn derives from the Keynesian premise that savings are bad, and accordingly have a minus sign in front of them when computed in the national income accounts...

...Speaker, the United States has the lowest personal saving rate of any major industrial nation-4.7 percent in the third quarter of 1980...

...since Tom Wicker has disapproved of all conservatives on principle ever since he forsook the South and joined the Hive of collectivism, one was immediately put on the alert: Jones cannot be a conservative at all-otherwise Tom Wicker wouldn't be praising him...

...Just as you have to subtract the inflation rate from interest rates today to find the real rate of interest (which is then lowered even further by the tax-deductible nature of interest payments), so you had to add the deflation rate to the nominally low interest rates in the Depression...

...Paul Samuelson, in his famous textbook, includes a diagram showing just such a pipe arrangement with a drain leading away from the pipes, marked "savings...

...Five years later, in the General Theory, he knew enough about intellectual fashions to serve this up with suitable, algebraic complexity...

...Thus credit was in reality expensive-"equivalent to nominal rates of 30 percent at today's rate of inflation," according to Alan Reynolds, lately vice president of the First National Bank of Chicago and now with Jude Wanniski's Poly-conomics...

...I wonder if he realized at that point that there is only one way to improve savings, and that is to lessen the tax penalty on upper income groups-something that Great Society true believers and Hive collectivists don't approve of at all...

...This, of course, created a strong propensity to save...

...Inside these mills were workers, worrying whether or not they had jobs...

...Keynes rightly noticed that this mechanism wasn't working correctly in the Depression...

...The current U.S...

...Keynes seems to have been inspired by Bernard Mandeville, an early eighteenth-century writer whose book The Parable of the Bees was condemned as a public nuisance by the County of Middlesex in 1723...

...The government decided for them...

...The water would then come along, turn around the water wheel, which operates the machinery inside the mill, and then-oh, joyous day-the workers would have jobs because the machinery was operating...

...The old Bloomsburyite Keynes let on in an unguarded moment that he believed the propensity to save stemmed from "Pride and Avarice...

...Keynes argued, in his utterly weird but nevertheless extremely influential book The General Theory of Employment, Interest and Money, that savings wasn't a good thing after all...

...At the time Keynes wrote the General Theory, the $100 would buy you $110 a year later...

...Savings are normally converted into investment by the mechanism of interest rates...

...CAPITOL IDEAS THE BLOOMSBURY SAVINGS & LOAN by Tom Bethell I was listening to the radio a few weeks ago when I realized that a counter-revolution had taken place in one important area of public policy...

...Without ever being quite conscious of it, Keynes was thinking of a system of hydraulic pipes...

...Why keep money in the bank when it will buy less and less each year...

...Can't tax policy be changed to encourage saving...

...tax policy deliberately defers to the old Keynesian wisdom and further discourages saving, the interest on which is called unearned income and taxed twice...

...But in today's very different circumstances, savings indeed should be encouraged...

...X3ut, as though that were not enough, U.S...

...Too true, Lord Maynard, too true...

...Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back...

...Representative Jim Jones of Oklahoma was being interviewed by Washington's WRC "all news" radio station...

...These controls would merely alter the aggregate quantity of water, or money, in the pipes...

...His Secretary of the Treasury Donald Regan believes that saving should be increased...

...Anyway, an aggregate quantity of money flowed around the pipes of the economy, and this was the equivalent of "demand," which in turn elicited "supply...

...Notice how this reverses the direction of reality...

...This of course will not happen, because the truth of the matter is that U.S...

...Curiously enough, Keynes himself (as far as I am aware) barely discusses this point anywhere in his writings...

...Keynes may have had a point about saving in the peculiar deflationary circumstances of the 1930s...

...Congressmen and senators are after all practical men...

...And Representative William Green of New York recently had this to say in the Congressional Record: Mr...

...But the idea was the same...

...Attached to the pipes were water wheels, or turbines, and these were attached to mills, or factories...

...But then of course it was none other than Lord Keynes himself who said, on the very last page of his famous book The General Theory of Employment, Interest and Money: Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slave of some defunct economist...

...Oh, I'm sure Alice Rivlin, the left-wing numbers-cranker so supinely retained on the federal payroll by Senator Domenici, still maintains her hostility to the virtuous and prudent practice, but by and large it is rapidly becoming impossible to find anyone in the public policy arena who is opposed to saving...

...And in fact said Jones has since shown himself to be a rather useless fellow-more interested in impressing the constituency of Great Society true believers than in representing First District Oklaho-mans...

...This I have called a counter-revolution because the original revolution was created by the British economist Lord Maynard Keynes about 50 years ago...

...Having said all that, however, we must concede that there was one feature of the 1930s that made Keynes's arguments a little more sensible than they otherwise would have been...

...It is hard to imagine this today...

...He never seemed to understand why...

...President Reagan has several times commented adversely on our low savings rate...

...and not only that, but taxed at a higher rate than salaries (above a certain threshold...

...This is the lock, or sluice gate, permitting savings to flow out of the stagnant pond-into what we now call the "supply side" of the economy (which did not exist in the Keynesian model because it was simply taken for granted...

...Savings piled up and weren't invested even though the interest rate for prime commercial paper was one percent in 1934...

...At least one can agree that there would naturally be a very strong tendency to save under such circumstances, and there might even be a need for some government policy to discourage saying...

...There was deflation...

...It was here that he reversed cause and effect in economics, arguing that the demand for goods (consumption) created the supply of them...

...Anyway, his comment was a step in the right direction, and at that point I began to keep a tally...

...In the real world, the efforts of workers create jobs, which result in things being made, which then pull into existence the money needed to buy these objects...

...rate has dropped by half over the past ten years to a level that is one-fourth the Japanese rate and one-third the German rate . . . When saving is inadequate, something has to give...

...But in fact they were very high in real terms because of the aforementioned deflation...

...Broadly speaking, in Keynesian economic theory, dominant for the past 45 years, no distinction is made between tax rates and tax revenues precisely because the one was presumed to be proportional to the other...

...public policy- despite all the rhetoric about the country "moving to the right"-is still heavily dominated by left-wing presumptions, the leading one of which is the belief that taxation should first and foremost be an instrument of punishment (of the rich) rather than revenue collection...

...There could be no more succinct explanation of Keynes's own theorizing...

...Because interest rates can't fall below zero (who would lend money to be repaid a smaller sum...

...Individuals didn't decide how their money would affect the economy...

...He is the congressman Tom Wicker of the New York Times has described approvingly as a conservative...

...Aggregate and average were almighty...

...In the Keynesian universe, savings were visualized as money ("liquidity") which had seeped out of the pipes and come to rest in useless, stagnant pools where they were unable to contribute to demand...