Fatal Fallacies, Part II (Electric Boogaloo)

"A penny saved is a penny earned." - Ben Franklin.

Ol' Ben was an interesting fellow. He was most certainly a genius, and as a Founding Father, his legacy is untouchable, except by liberals who hate America and want to tell you the truth that the FFs were actually human. But I'm not here to talk about Ben. I'm here to point out that this famous saying is a load of horse dung. Well, let me be more fair. The idea that there is some nobility in the 21st century in saving is just plain false. It is rather counter-productive.

Now, I am not saying people should save nothing. It makes a lot of sense to have cash on hand, and it makes a LOT of sense to plan for your future that you hope you'll have (ooh, dark). That planning involves saving and/or investing. I'll leave it to the pros to get into the details on this topic.

What I'd like to disabuse you of is the notion that your savings somehow leads to economic growth. You know, keep your money in the bank, the bank lends it out, people do great things with your money the bank lent them at a profit, and we all live happily ever after. Poppycock. Or so says Mr. Vickrey:

Fallacy 2
Urging or providing incentives for individuals to try to save more is said to stimulate investment and economic growth. This seems to derive from an assumption of an unchanged aggregate output so that what is not used for consumption will necessarily and automatically be devoted to capital formation.

Again, actually the exact reverse is true. In a money economy, for most individuals a decision to try to save more means a decision to spend less; less spending by a saver means less income and less saving for the vendors and producers, and aggregate saving is not increased, but diminished as vendors in turn reduce their purchases, national income is reduced and with it national saving. A given individual may indeed succeed in increasing his own saving, but only at the expense of reducing the income and saving of others by even more.

Where the saving consists of reduced spending on nonstorable services, such as a haircut, the effect on the vendor's income and saving is immediate and obvious. Where a storable commodity is involved, there may be an immediate temporary investment in inventory, but this will soon disappear as the vendor cuts back on orders from his suppliers to return the inventory to a normal level, eventually leading to a cutback of production, employment, and income.
Saving does not create "loanable funds" out of thin air. There is no presumption that the additional bank balance of the saver will increase the ability of his bank to extend credit by more than the credit supplying ability of the vendor's bank will be reduced. If anything, the vendor is more likely to be active in equities markets or to use credit enhanced by the sale to invest in his business, than a saver responding to inducements such as IRA's, exemption or deferral of taxes on pension fund accruals, and the like, so that the net effect of the saving inducement is to reduce the overall extension of bank loans. Attempted saving, with corresponding reduction in spending, does nothing to enhance the willingness of banks and other lenders to finance adequately promising investment projects [enemy emphasis mine]. With unemployed resources available, saving is neither a prerequisite nor a stimulus to, but a consequence of capital formation, as the income generated by capital formation provides a source of additional savings.