SAVINGS RATE KEY TO ECONOMIC RECOVERY
By Antonius Patrick
A little over a year has now elapsed since the much-criticized
“stimulus package” was enacted into law. Despite the legislation’s dismal
performance—unemployment remains close to 10 percent—the Obama administration
is orchestrating a media blitz touting its supposed benefits in the hopes that
enough support can be garnered to pass a “son of stimulus” jobs bill.
As they have demonstrated since the start of the
financial crisis and ensuing recession/depression, Democrats and a number of
Republicans, most recently newly elected Scott Brown of Massachusetts, have displayed a fundamental
lack of understanding on the subject of employment. In only the third vote of
what may be a very short career, Brown voted with 55 Democrats and four other
Republicans for the newest jobs measure.
In a statement explaining his vote, the senator believed
that the measure was “not perfect,” but would “put people back to work.” Although
new to the ways of Washington, Brown appears
to have quickly mastered how to nuance a sellout: “I hope my vote today is a strong
step toward restoring bipartisanship in Washington,
D.C.”
At one time, most people understood that the creation of
employment by the government can only come at the expense of the private sector.
The state can create jobs, but it can only do so by levying or raising taxes, printing
money or issuing debt. Such actions usually retard employment, the exact
opposite of what governments say they hope to achieve.
Government-created jobs are not tied to consumer demand,
but instead are “politically mandated.” In the private sector, the creation of
employment is directly linked to those industries and services that consumers patronize.
Businesses that satisfy consumers expand and grow.
Furthermore, profitable industries attract competitors, which,
to successfully compete, have to hire workers, further expanding employment.
The point is that in private enterprise, job creation is directly tied to
consumers, who, through their purchases, direct resources and labor into those
industries that are most responsive to their wants and needs.
Real employment can only come about through the creation of
genuine savings not via the printing press, but by abstention from consumption.
Production takes place over time; workers have to be paid during the process
before goods are finished and sold. Thus, savings are required to pay wages in
the present as production takes place.
The greater an economy’s savings rate, the more production projects
can be undertaken, and with it more employment. Savings, therefore, provide the
means for the payment of wages during the lengthy periods of production. Wage rates, too, are tied to savings.
Businessmen compete with each other not only for consumer patronage, but also
for employees. To attract workers, businessmen have to offer better
compensation (mostly in wages) than their rivals. The greater an economy’s
savings rate is, the more entrepreneurs have to bid workers away from one
another. The competition for workers is how wages increase.
The great enemy of savings is taxation. A heavy tax rate
discourages people to save since they are penalized even further by abstaining
from consumption and paying taxes. Higher tax rates, therefore, will make
individuals present-oriented.
In regard to taxation and savings: it is not the type of tax
that is important, but the overall tax burden that affects savings. The greater
the burden, the lower the savings rate, which results in lower employment and wage
rates.
If politicians are really concerned about the
unemployment rate, they would abandon plans for further unproductive job
programs and start enacting serious tax cut measures, or better yet, abolishing
taxes, starting with the egregious federal income tax. Now that is change
Americans can really believe in.
Antonius Patrick lives in Virginia and is a finance writer for AFP.
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(Issue # 13, March 29, 2010)
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