Why Economists Should Always 'Holiday' During the Holidays

Without fail the holiday season brings with it reportage about the appetite of the U.S. consumer. "Are Americans buying enough to keep the economy afloat" paraphrases a question that is always asked.

And like moths to a flame, economists who populate a profession that almost monolithically worships at the altar of consumption offer their alleged insights. They're bearish if they think Americans are saving too much, and bullish if they think we're making sailors appear prudent.

This year Paul Ashworth, chief U.S. economist at research firm Capital Economics, was given the proverbial floor by the Wall Street Journal's Ben Leubsdorf and Josh Mitchell in an article titled - you guessed it - "Consumers Keeping Growth Afloat." The bull in Ashworth told the reporters that "The real strength of the economy is consumption," and with the latter in mind, the economy is "on solid footing." Where does one begin?

Nearly always missed by the credentialed is that the consumption they venerate is merely an effect of production. If we ignore the numerous reasons that GDP is already fraudulent, one of the least discussed concerns the statistic always shouted by economists and reporters alike about consumption accounting for two-thirds of GDP. No, it doesn't.

We can only consume insofar as we produce first. There's no getting around this truth. If readers doubt this, they need only stop working for a year and see how much they can consume. If they want to buy things they had better have savings from past production, the ability to borrow from other producers based on future production, or they better know someone productive who also happens to be generous.  All consumption springs from production, which means GDP is 100% production.

What's odd is that economists would waste energy trying to devise ways to stimulate consumption in the first place. Consumption is the easy part. As individuals we all have infinite wants that we'd like to fulfill. But as we all at least individually know, our ability to fulfill endless wants is directly related to our ability to produce in exchange for all that we desire.

What sets us up to produce? It's nearly always investment. This is what economists miss. As is they equate savings with a lack of consumption, but their assumptions are plainly untrue. To save isn't to not consume; rather it's to merely shift one's consumptive abilities to someone else with immediate desires. Banks don't take in savings only to stare at them. They pay for savings (liabilities) because loan demand means they can immediately turn those savings into loans (assets). Short of being stuffed under mattresses, there's no such thing as idle savings. When for instance the millionaire next door or the Chinese worker on the other side of the world saves, neither is reducing consumption. To produce is to consume even if the producer has no consumptive desires.

Even better when it comes to savings is that sometimes they morph into investment, or they're lent to producers in need of investment. Production is the source of demand, entrepreneurs can only produce insofar as there's capital (savings what we borrow in order to access capital goods) available to them, so savings by extension are the source of major demand expansion. They are because they fund production enhancements. Is a worker with a computer and high-speed internet more productive and capable of earning more than one only in possession of pen and paper? You get the picture.

With corporations there are countless examples, but Apple Computer became just that thanks to an initial investment from venture capitalist Arthur Rock. Savings of $75,000 that were part of Rock's venture capital fund ultimately led to millions worth of new demand from Apple alone. Notable about the venture capital industry is that particularly in the early days its financial backing largely consisted of old, inherited money of the Rockefeller and Vanderbilt variety. Thank goodness the heirs didn't spend all of their inheritance with an eye on boosting consumption. They saved, and in the process created exponentially more demand through their funding of what became Silicon Valley.

Moving to 1997 when deposed founder Steve Jobs returned to Apple, the once high-flying company was nearly bankrupt. Thankfully Bill Gates had $150 million lying around to help save the company. Gates's savings helped fund a turnaround of a company that has since become the world's most valuable. Gates could have quickly "stimulated" the economy with a $150 million buying spree, but for saving gifted the economy with production countless times greater.

Going back over 100 years to the early part of the 20th century, Steve Jobs' entrepreneurial equivalent in Henry Ford incorporated his eponymous car company in 1903. A saver extraordinaire, Ford feverishly plowed his limited profits back into what was then an unproven assembly-line concept. Imagine if he'd instead chosen to spend his limited earnings, or worse, if politicians had taxed away his corporate and individual earnings with an eye on spending them right away in order to "stimulate" the economy. Far fetched? Not really. Remember, economists think government consumption of the wealth we create stimulates growth even though what government spends was taken from individuals and companies first....Economists call government spending "stimulus," but do any readers really believe that Paul Ryan and Nancy Pelosi are better at allocating the economy's resources than are Jeff Bezos, Michael Dell and Sergey Brin?

Economists see "demand" rise as spending does, but their worship of consumption means they miss the exponentially greater production (and subsequently much greater demand) that springs from savings. A profession focused on the here and now misses the long-term, and much more economically positive impact of delayed gratification that frees up capital for the companies of tomorrow.

But if that's not enough, let's never forget that an economy isn't a blob; it's just a collection of individuals. Since an economy is just individuals, what's good for the individual must be good for the economy as a whole. Are individuals who spend every cent they earn better off than those who save? The answer is obvious. When the holidays come, and reporters call, economists would be better off taking a holiday.