More on the False Thrift Paradox

Is the Economy a Perpetual Motion Machine?

03/25/2009 William L. Anderson

The lead story of the March 9, 2009, edition of Newsweek says it all:“Stop Saving Now!”

Writer Daniel Gross declares,

For our $14 trillion economy to recover and thrive, hoarders must open their wallets and become consumers, and businesses must once again be willing to roll the dice. Nobody is advocating a return to the debt-fueled days of 4,000-square-foot second homes, $1,000 handbags and $6 specialty coffees. But in our economy, in which 70 percent of activity is derived from consumers, we do need our neighbors to spend. Otherwise we fall into what economist John Maynard Keynes called the “paradox of thrift.” If everyone saves during a slack period, economic activity will decrease, thus making everyone poorer. We also need to start investing again—not necessarily in the stock of Citigroup or in condos in Miami. But rather to build skills, to create the new companies that are so vital to growth, and to fund the discovery and development of new technologies.

Now, this should hardly be surprising, coming from Newsweek, which has managed to mangle everything from economic analysis to the Duke lacrosse case. Furthermore, it is based upon economic myths that are repeated twice weekly by Paul Krugman at the New York Times and Larry Summers in the White House — and about every other public intellectual.

However, we need to remind ourselves that we are hearing myths that not only represent wrongheaded economic thinking but that are also driving the US economy into a deep depression through reckless spending and resource destruction. The actions of Obama and the Beltway are political in nature, but they have the veneer of economic “theory.”

If I can put the whole Keynesian set of fallacies into one statement, it would be this: the modern Keynesians believe that the economy operates like a perpetual motion machine, with government spending being the “grease” that keeps it from slowing down. The “friction” in this economic machine, according to the pundits, is private saving. Eliminate it, and the economy goes on forever, adding energy and expanding indefinitely.

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