Cooking the Goose

It happened one summer
It happened one time
It happened forever
For a short time
--The Motels

Insightful piece by Frank Shostak. He observes that economists, politicians, et al. who are elevating 'job creation' as the number one priority in getting the economy moving misidentify the key driver of economic growth. The main driver of economic growth is not reducing the number of unemployed. Economies grow in sustainable fashion through an expanding pool of real savings.

Savings is income that is set aside rather than consumed. When projects to create or improve new products and processes appear to offer an attractive risk/reward profile, then people will invest some of their saved economic resources toward these projects. This fraction of savings is called capital. Capital expands and enhances the infrastructure used to produce the goods and services linked to standard of living.

The chain goes like this: real savings --> capital for investment --> enhanced productive infrastructure --> better goods and services --> higher standard of living.

Please note that stimulus programs, tax increases, money printing, et al are not part of this chain.

Jobs that enhance individual purchasing power come from the expanded industrial infrastructure. The better the infrastructure, the more output an individual can generate. Higher productivity commands higher wages in terms of purchasing power.

It is saving, therefore, that creates jobs.

Our problem, of course, is that savings in the US have been in secular decline. There is a dearth of real savings to deploy in capital investment projects.

Yet, Washington bureaucrats and their economic advisors continue to enact monetary and fiscal policies that discourage rather than promote savings. A glaring example of this is the Fed's zero interest rate policy (ZIRP). ZIRP's expression at the retail level is yields on savings vehicles near zero percent. Prospective savers are motivated to do something else with their income--namely spend (consume) it or take risk with it even if the risk/reward profile appears unattractive.

Loose monetary and fiscal policies divert real savings away from wealth generating activities. Money-printing, taxation, and government spending programs confiscate remaining pockets of real savings from their owners. This wealth is transferred into the hands of bureaucrats and their interests, where it is spent under the guise of 'economic stimulus.'

What these programs constitute is capital consumption. When savings is spent, economic recovery (and job creation) is pushed farther out into the future.

As kids we learn the story of the goose that lays the golden eggs. If you cook the goose because you are hungry today, then there is no wealth tomorrow.

Savings is the goose, and it is being cooked.