Thursday, January 15, 2009

The "Paradox of Thrift" Fallacy

The so-called establishment economic “experts” raised on Keynesian claptrap, lament these days about the “paradox of thrift.” Based on the fallacious notion that the key to prosperity is consumption, they complain about people’s propensity to save during a recession, which of course makes perfect sense for those who are leery of what is to come, may have had savings depleted and wonder if their job will still be there tomorrow. “But this is a consumer driven economy” so says the establishment literati. Therefore we need a stimulus package of government spending and tax cuts to jump start the economy and get consumers spending again.

Of course, these befuddled apostles of Keynes confuse cause with result. In a truly prosperous economy, consumer spending is a result of productivity and the resultant prosperity, not the cause. If it were the cause, then why not a $700 trillion stimulus package instead of $700 billion. Wouldn’t that be a thousand times better? Actually, the federal government doesn’t have one dime to dole out, what with a $55 trillion dollar debt looming (based on true accountancy principles from which the government exempts itself).

Not that tax cuts aren’t a great idea. Tax elimination would be even better, and to paraphrase Henry David Thoreau, will someday happen when the people are ready for it.

Certainly, tax cuts will increase productivity. They always do, and will to some extent mitigate the damage of increased government spending. However, tax cuts coupled with extravagant spending will only postpone the day of reckoning when we, our grand children and our great grand children will pay for these inflationary policies.

Deep down, these “experts” know that there isn’t any $700 billion to stimulate with, let alone $700 trillion. One must save and invest first before having money to stimulate. But printing this money out of thin air might make some people feel good for awhile. Sure, in the long run, such a tactic is inflationary, but heck, in the long run, we are all dead, as Keynes was apt to point out when asked about his inflationary policies.

In a “democracy”, which this country has unconstitutionally devolved into, politicians must constantly pledge the moon to constituents, whether they can deliver it or not. But with their enabler, the Federal Reserve system, the politicians can at least create and to an extent, perpetuate the illusion that it is indeed the moon, a paper moon, + that they have delivered to its constituents. If there is a problem, government is their to solve it. “Do something!” “Do something now!” And the politicians deliver. As H. L Mencken once said, “Democracy is the theory that the common people know what they want and deserve to get it good and hard.”

When the inflationary stimulus comes home to roost, “good-and-hard” is going to have all new meaning. We are now in a necessary downturn in the economy as a result of inflationary policies that created a financial bubble in the housing market. The necessary correction, the necessary pain has only begun but is something the free market can work out, if allowed. Unfortunately, politicians and their impatient constituents aren’t going to allow this to happen.

We’re in for “interesting times.”


  1. Excellent article, Ken! I try to tell people this all the time (though you wrote it more eloquently). I just wish more people could see this -- have you tried submitting it to any newspapers or such?

    - NealR

  2. I was going to, then I stopped myself. I thought I had to rework it for general public palatability. Maybe I should just send it and see what happens.


  3. Said better than I ever could Ken. I'm tired of screaming it off the rooftops, to people who can't hear or see through the political fog. Robby, from the 60's.

  4. Obamas promises. Follow them here. Scroll down, sign up for the weekly newsletter.