August 01, 2009

Savings, Schmavings!

By Dr. William Luckey *

Dear Dr. Luckey, I realize that savings is good for the individual—for contingencies, vacations, retirement—but why is it good for the nation as a whole?


This is an excellent question, and one which very few people ask themselves, or know anything about. John Maynard Keynes, an economist whom I have roundly criticized in these pages, believed that there was a “paradox of thrift,” that is to say, that savings pulled money out of the economy, so that the things which companies planned to make would not be sold, people having saved money that should be spent on consumption. This would cause continued economic recession as companies would have unsold goods, would have to lower prices, and would lay off employees. This process would continue year after year, unless the government would, by deficit spending, put extra money in the hands of the consumers to offset the savings. This is utter nonsense, but has suddenly become popular again since Obama was elected to the presidency. Look at the media coverage of Christmas time—retail sales, this; retail sails, that. It is as if the whole country depended on retail sales.


Let us go back in time in the production process and ask ourselves where the consumer goods came from in the first place. St. Thomas Aquinas pointed out that what is first in intention is last in execution. In economics, this means that the desire to have and provide a consumer good is the last stage of a process that brings into existence resources that were not necessarily related before. These “higher level” goods include things like taking iron ore out of the ground, which no one would do just because they were bored, but they would do if they were paid for doing it, because the ultimate goal of the ore is the frame of an automobile, or some such consumer good. It includes transportation, factories, machinery engineers, machinists, and on and on.


If a nation spent all its money on consumer goods today, what would they have left for tomorrow? Nothing. This means that in order to have consumer goods in the future, we have to have capital goods, goods used to produce consumer goods in the future, today. The capital goods are those mentioned in the last paragraph. On the face of it, money must be spent just to keep the current stock of capital goods functioning at current levels, providing the same amount and quality of consumer goods coming tomorrow as we had today. That means something has to pay for the wear and tear of the equipment, and replacement when something is no longer functional. This is called depreciation and purchase of new equipment to replace the old. This also applies to people. Workers retire, die, move to other jobs, need retraining, etc. It costs money to replace and train workers, and this must be done all up the line, back to the iron mine. Where does this money come from, consumption? Well, certainly companies use most of their profits, if they have had any, to do all this equipment maintenance and personnel replacement. That is corporate savings. But frequently, the company has to go to the capital markets, i.e., the stock and bond markets, and banks, for money for this purpose. Where does this money come from? Our SAVINGS!


When you save money in a commercial bank, or put money in corporate bonds, you make that money available for companies to borrow. When you buy stocks, a company can get money from an investment bank based on the current price of their stock, which will form the basis for an initial purchase option, where the bank will give (not lend) the company money based on the probable price they will get offering new stock on the market. So this all comes from savings—your savings and mine. No savings—no replacement of aging equipment and personnel.


But, there is more. Competition between companies in the same industry forces companies to update and improve their products. If Company A sits back and relaxes, content merely to replace their equipment and current employees if they leave, another competitor, Company B, in its attempt to get more sales, will spend money, first on research and development of new and improved products, and once tested, it will spend money on the production of said products. Company A knows full well, unless their leadership is incompetent, that they have to do the same or go out of business. Where do Companies A and B get the money to do this? SAVINGS. How do these companies get you to save? They do so by promising a return on your savings. Take a bank, for instance (don’t really take a bank—you’ll go to jail). If you put your money in a savings account, you are promised, say, 5% interest. The bank lends that money out to a company expecting, say, a 10% return. The bank keeps 5% and gives the other 5% to its depositors. If you buy a corporate bond, you are lending the company money at a promised return. If you buy stocks, there is no guaranteed return, and that is why research of a company is necessary prior to buying stocks. The purchaser, or his broker, must take an educated guess, based on past history and current prospects, as to what the future stock price will get to over a certain time, in order to make the purchase worth while. All of this is done with savings.


Well, how do taxes affect the savings picture? Taxes reduce the amount you and companies have available to save. Since the American government never saves anything, but is in an $11.6 trillion-dollar debt, national savings is in negative territory. In addition, our propensity to consume on credit means that we have no private savings. Since 1983, the citizens of this country have reduced their savings rate from about 11% of their income, to about -3% in 2006. We are dissaving. Now much of this occurs because taxes are eating up our salaries, so just living at a constant level of comfort is becoming more expensive. Also, inflation, caused by the government’s expansion of the money supply and deficit spending, causes prices to rise without any increase in productivity. I believe that our tendency to go into private debt is caused by these phenomena. Take my case, for example. We were well off but by no means millionaires. But my dad gave me the checkbook when I had to pay tuition at my private  Catholic university, and would just ask me what amount I wrote the check for. I never had to take out a loan, nor did I have to have work-study. Who can do that any more?


Savings is important in your life. The more of your income you spend now, the less you will have to live on during retirement. The more you save now, the better you will live in your retirement. Things like Social Security tempt people not to save for retirement. I used to sell retirement plans. So many people told me that they did not need any retirement plan because Social Security will take care of them.  Those clients of mine who are still alive, if they did not heed my advice, are probably on welfare today.


God expects us to use our heads to provide for ourselves. It is true that the success of our plans depends totally on God, but we are expected to have plans and carry them out in the first place.


This reminds me of a cute joke illustrative of this point. There was going to be a great flood in the midwest United States, and there was a man sitting on his porch. A National Guard jeep came by and the soldiers in the jeep tried to persuade the man to go with them. But he replied: “God will save me.” Well, then the flood waters were up to his second story window when a National Guard boat came by and tried to get him into the boat. He replied: “No, God will save me!” Finally, he is sitting on the pinnacle of his roof and a National Guard helicopter comes and throws him a line. He rejects the attempt to save him, saying again: “God will save me.” The man drowns and goes to the judgment. He says to God, “I had such faith in you, why didn’t you save me?” God replied: “I sent you a jeep, a boat and a helicopter; what more do you want?”


Dr. William Luckey is the former chairman of the department of Political Science and Economics at Christendom College, where he is currently a professor.  He holds advanced degrees in Business, Economics, Political Philosophy and Systematic Theology. He was married in 1971, has four children and 12 (soon to be 13) grandchildren, and is a Lay Dominican.

You can visit his blog entitled Catholic Truths on Economics at:

* Catholic News Agency columns are opinion and do not necessarily express the perspective of the agency.


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