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Why Saving Is Right and Economists Are Wrong

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Consumer spending is not the way to recovery, and to understand why, we must ask ourselves why we continue to have boom and bust cycles.

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In George Orwell's brilliant novel Nineteen Eighty-Four, one of the characters, Syme, in discussing the nature of Newspeak, says "It's a beautiful thing, the destruction of words." Newspeak was a systematic attempt by the dictators of Oceania, a totalitarian society eerily similar to North Korea, to control thought by eliminating words that gave rise to ideas they disapproved. What Syme and Orwell are talking about is that the destruction of words is the destruction of ideas.

There is a parallel to this in contemporary economic thought. Mainstream economists, Keynesians, Neo-Keynesians, and Neoclassicists, would have you believe that what common sense would call "good" is now "bad." Conversely, "bad" is the new "good." I don't mean to suggest that the US is heading toward becoming a North Korea. My point is that that the experts seem to abandon common sense and yet most people instinctively understand that good is good.

Common sense is the crux of Austrian theory economics. Austrians look at how individuals act, not how "economies" or "nations" act or behave. Ludwig von Mises, the greatest Austrian thinker, and in my opinion the greatest economist, entitled his great work, Human Action not National Action. The Austrian School was referred to by the Germans as the Psychological School because its analysis started with individual action and how those actions would either attain or fail to attain the goals sought by individuals. In other words, it involves a lot of the "common sense" that guides human behavior most of the time. It's comforting to know there's a philosophy of economics that conforms to what human beings actually do rather than how some economist thinks we ought to behave.

Examples of economic Newspeak flourish, especially if you listen to President Obama's economic team. My favorite example is the present conflict between consumer spending and consumer saving. Since the crash, consumers have cut back on spending and are increasing their savings. Most economists are saying this is bad for the economy; they urge us to spend, spend, spend to save the economy.

Actually, it's just the opposite: Saving is the road to recovery.

It seems rather obvious that during a downturn of the economy it would be natural for people to save more and spend less: They're uncertain about their jobs; the values of their homes have plummeted (about 30% since the peak in 2006); their stocks have declined, and their debts are high. Isn't it common sense that people are doing the rational thing by saving? This is something our parents and grandparents understood well.

Yet Keynesian economists, the dominant economic theory today, tell us that consumers should be spending rather than saving. "Don't you realize," they say, "that 70% of our economy is based on consumer spending. Why do you think we have all that unemployment? We won't recover until we can get people to starting buying stuff again!" Since we aren't spending they've got the government to do our spending for us. Paying one man to dig a hole and paying another man to fill it is, under Keynesian theory, the path to recovery.

According to their logic, we had the biggest financial bust in world history because consumers wrongfully just stopped spending. If that was the case, it's funny we didn't hear these people warn us about too much consumer spending during the housing bubble.
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