Great News for the Middle Class: The Rich Are Getting Richer
"Were two men of equal fortune to spend their revenue, the one chiefly in the one way, the other in the other, the magnificence of the person whose expense had been chiefly in durable commodities, would be continually increasing, every day's expense contributing something to support and heighten the effect of that of the following day; that of the other, on the contrary, would be no greater at the end of the period than at the beginning." Adam Smith, The Wealth of Nations, p. 378
While the numbers calculated by the Federal Reserve should generally be met with a great deal of skepticism, last week the central bank released a report that showed rising net worth for U.S. households and non-profits. According to the Fed data, the total increased $1.6 trillion to $84.9 trillion.
What this tells us first and foremost is that despite what we hear from pundits, Americans are great savers. If anyone doubts what $84.9 trillion reveals to be undeniably true, they need only practice an experiment on themselves. Specifically, they should spend every penny of income they take home with each paycheck. If so, whether the experiment takes place over 3 months or 3 years, the end result is that individuals who consume with abandon will have little to no wealth to speak of at experiment's conclusion.
The simple truth is that there's no wealth without savings. And there's no getting around the latter.
That there's so much wealth in the United States is a reminder that statistics pointing to a "low savings rate" in the U.S. are bogus. Absent the $84.9 trillion number we'd still know the stat to be flawed by merely watching televised sports each weekend. To watch is to be inundated with ads promoting banks, mutual funds, ETFs, life insurance, and actively managed accounts. If Americans weren't great savers, and wealthy ones at that, sports television logically wouldn't be full of so many ads from businesses seeking to manage that wealth.
So if what's surely true about Americans being great savers can be accepted, it's worthwhile now to address the comical Keynesian notion that savings are bad. Focused solely on consumption, Keynesians say the economy is harmed when people fail to consume.
Missed by those who worship at the altar of always empty savings and brokerage accounts is that an economy is a collection of individuals. Broken down to the individual, the notion that individuals are made better off by consuming every cent earned is laughable. Individuals are the economy, so what's good for the individual is good for the economy.
The above is made rather plain when we consider what happens when people save. Returning to Adam Smith, he wrote in The Wealth of Nations that "It is by means of an additional capital only, that the undertaker of any work can either provide his workmen with better machinery, or make a more proper distribution of employment among them." Smith was simply saying that there are no jobs absent savings, not to mention that savings are what boost the productivity of the worker in the first place.
That jobs can't be created without savings is a blinding glimpse of the obvious. As for the truth that follows the first, this is something entirely missed by Keynesians solely focused on near-term consumption. They grow giddy at the thought of individuals emptying their bank accounts to spend, but miss that just as there is no wealth without savings first, there is similarly no consumption without production. Production is tautologically the source of all consumption. In that case, savings that migrate toward ideas that increase productivity per worker (think tractors over shovels, computers over typewriters, delivery trucks over horse-drawn carriages, e-mail over snail mail) ultimately foster exponentially greater consumption.
The above looms large given the title of this piece, and in light of an assertion made by the Wall Street Journal's Neil Shah about the alleged downside to the $84.9 trillion calculation. As Shah mistakenly explained it,
"Of course, much of the nation's wealth gains go to the affluent, who tend to own stocks and save large portions of their money, limiting the overall benefits to the economy."
It's not Shah's fault that he's merely reporting what a bankrupt economics profession informed by Keynes broadly believes, but in suggesting that the economy is harmed by the concentration of wealth in the hands of the rich, Shah unwittingly explained why the poor and middle class should cheer what Shah himself laments. To see why, we need only return to the Smith quote just discussed.
The rich, by the very adjective used to describe them, have lots of disposable wealth that they don't consume. Precisely because the poor and middle class have less in the way of income, they're comsuming a lot more of what they do earn in total on life's perishable necessities. But the rich once again have lots of wealth they don't immediately consume, and because they do it's immediately redistributed to companies in need of capital to hire, and to investments that boost productivity per worker on the way to higher pay per worker.
Indeed, as Shah himself explains it, the rich "tend to own stocks and save large portions of their money." Exactly. Unless the rich are literally stuffing their wealth under mattresses, the wealth they save has a wondrously good impact on the poor and middle class for it being redistributed to them in the form of pay, and even better, in the form of investment that boosts their productivity and pay.
Shah's error lay in presuming that lots of wealth in the hands of the rich holds down economic growth. In fact, it achieves the wondrous opposite. There are once again no jobs without investment, and no productivity enhancements that boost worker pay without investment. Far from bemoaning the rising concentration of wealth a la Shah and others, the poor and middle class should rejoice. There are new jobs and rising pay in the wealth that the rich diligently put to work with an eye on growing even wealthier.
