At risk of sending some readers into shock in consideration of how much they, their parents, the federal government, or all three spent on their college education, odds are they learned very little if their major was economics. That is so because the professorial class near monolithically believes “consumption” is the driver of economic growth. Imagine that!
To think if we would just “consume” more that the economy would magically grow.
Funny about all this is that most economics majors learned right away about the bogus nature of their classroom instruction once they entered the working world. Presumably it dawned on them then that consumption is what happens after production. Those who proved very productive on the job found that their capacity to consume was extensive. Those who weren’t terribly productive found that this directly limited their ability to buy things. And then those whose productivity was so low that they were rendered unemployed, soon found that their ability to consume at all was a function of the productivity of others being shifted to them.
Nothing against the fun and friends of college, but life is the ultimate teacher. Life teaches us in sometimes brutal fashion how dopey is the notion that consumption powers economic growth. No, it’s a consequence.
Which brings us to the latest “catastrophic” GDP number. About the economy, it should first be said that what politicians on the local, state and national level did to it was and is nothing short of inhumane. Even though economic growth has been the biggest historical foe of virus, disease and death, politicians eager to be seen “doing something” decided that “doing something” in response to a new coronavirus was to force a contraction on the economy via lockdowns of varying stringency. Wow!
Fight a virus with economic desperation, even though economic growth produces the resources necessary to experiment on the way to protections from what sickens and kills? Furthermore, what about the potential for illness and death requires governmental force to avoid as is? Historians will surely marvel at the shocking stupidity that informed the U.S. response.
Back to GDP, this most backwards of measures revealed a 32.9% decline last week. That it did serves as a reminder of how worthless the calculation is.
Indeed, as a Wall Street Journal editorial pointed out, consumer spending “fell 34.6% and accounted for some 25 percentage points of the GDP decline.” You see, GDP largely measures what happens after people are productive.
Notable here is that a decline in healthcare spending “subtracted 9.5 percentage points from GDP.” Healthcare is said to be “12% of the U.S. economy,” but it similarly is a consumptive consequence of production. Americans spend a lot on consumer goods, including healthcare, precisely because they’re so productive.
Of course, all of this decreased consumption speaks to why economies generally recover so quickly when left alone, and also why investors are optimistic about the future despite the needless wreckage created by politicians. Investors who populate “markets” can’t operate based on theory. Reality ultimately intrudes in the marketplace.
So while nail-biting economists focus on the reduced spending that is forming their dire forecasts about the present and future, anyone with a clue can see that wrongheaded as the forced contraction was, the seeds of revival are being planted. Stated simply, the reduced consumption that brought on a “catastrophic” GDP print sets the stage for rebound.
It does simply because savings and investment, not consumption, are the true drivers of economic growth. Entrepreneurs cannot innovate, and companies can’t grow or be founded without savings first. There’s no getting around this truth.
And when thinking about “companies,” readers should never forget that companies are people. When people are matched with investment, their ability to produce in abundant fashion grows and grows. Making simple what already is, does high speed internet of the present enable a much more productive work experience than did the dial-up that was the norm in the 2nd half of the 1990s? The question answers itself.
That it does explains why the markets that so many say are “decoupled” from reality are actually just discounting what will happen once politicians free the people to work and produce again. Their capacity to produce will be bolstered by a huge surge in savings.
None of this is to defend the economic tragedy that politicians around the world foisted on their people, but it is to say that enhanced savings that are a consequence of past production, and that bring down backward measures of economic growth, do bring with them a silver lining. Savings set the stage for a rebound precisely because savings are what drive economic growth.
Just don’t expect to hear this simple truth from most any economist. Deep believers in the religion that is consumption, they can’t see that the latter is the easy part. That what really powers growth is the capacity to save the fruits of one’s production so that workers can produce (and ulimately consume) even more.
John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His new book is titled They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers. Other books by Tamny include The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at email@example.com.