Saving Is Good for Our Economy

from John Tamny:

In his essential book The Wealth of Nations, Adam Smith observed that "Capitals are increased by parsimony, and diminished by prodigality and misconduct." Or, put more simply, self-interested savers are an economy's ultimate benefactor.
More modernly, Joseph Schumpeter noted that there are no entrepreneurs without capital. Innovative concepts are just that until they're matched with funds offered by the parsimonious who, by virtue of their willingness to delay consumption, have the means to provide the financing necessary to turn an idea into a product.
So while basic logic should put the frugal at the top of the economic pyramid, one would be hard-pressed to find their supporters in the mainstream media. This is particularly true during the holiday season, when any hint of moderation on the part of consumers is considered a signal that the economy is in dire straits.
Recently USA Today reported that "More than half of U.S. residents who wanted to travel during the holidays have significantly cut back their plans or canceled trips altogether because of the fragile economy." Supposedly this decline will "undermine the travel business, even as the economy shows tepid signs of recovery."
At first glance this might make sense, given that airlines need to fill their planes in order to be profitable. More to the point, it's accepted wisdom that consumption accounts for 70% of GDP.
Yet this makes little sense. First (ignoring what a worthless measure GDP is), the mainstream media and the economists they look to for insights have it all wrong. For one, there's no consumption without production first, so in truth the U.S. economy (and any national economy for that matter) is solely made up of production, with consumption merely the result of the former.
Second, one reason the economy is recovering is, paradoxically, illustrated by the timid travelers who've chosen to stay home this holiday season due to fear about the economy. Americans who are staying put are stimulating the economy without even knowing it.
USA Today observed that the silver lining in a drop-off in travel is less in the way of highway congestion and airport delays. But the unmentioned and more important silver lining has to do with the impact of saving. To the extent that Americans are keeping money in the bank over visiting friends and relatives, their saved money adds to the base of available capital that will be lent to others.
For those still in thrall to consumption, the act of putting off travel in its most basic sense means that individuals will transfer their spending power to others with near-term consumptive needs. In that sense, no act of consumption ever detracts from demand. The act of saving is merely a shift of demand.
Even better for an economy still trying to find its legs is the greater reality that consumers are once again very worried. As a result, the majority of funds saved by worried individuals will be lent to businesses eager to grow, and with their growth will come the creation of new jobs, not to mention innovations that will make us happier and more productive.
Most economists place consumption at the center of all economic activity, but it seems in doing so that they ignore what truly drives economic advances. Consumption is always going to occur--it is one reason we work--but we truly stimulate the economy when we save.
Indeed, if consumption were our sole objective in working, not only would we have no assets, we would live unhealthy lives full of deprivation. From pharmaceutical advances that improve our health to technological advances, such as the computer, that make us more productive, to gains in transportation that allow us to travel the world, all are with us today thanks to the willingness of individuals to delay consumption. In much the same way, careful spending habits in the present will drive tomorrow's innovations.
Life-enhancing ideas are once again just that without savings. If we live paycheck to paycheck under the mistaken assumption that we're stimulating the economy, we're doing just the opposite. And when big-ticket items such as cars, housing and vacations are considered, for the average American they require extended saving over multiple paychecks to become a purchased reality.
It's too often the case that economists whose minds have been polluted by Keynes seek to devise ways to stimulate consumption during periods of economic hardship. Their thinking is wrongheaded, and it elongates recessions for limited funds being consumed rather than offered to entrepreneurs.
Happily, and as evidenced by the gun-shy nature of U.S. consumers at present, the average American is not fooled by self-assured academics. As individuals we generally know that it's best to conserve funds during periods of economic uncertainty.
But what's not widely known is how our frugality is the economy's booster shot. Savings are behind nearly all economic advances, so rather than worrying about how our individual spending is harming the economy, we should rest easy with certain knowledge that our thrift is authoring its recovery.
John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics and a senior economic adviser to Toreador Research and Trading. He writes a weekly column for Forbes.