The Role of Savings; B. Summers

Saving is a form of spending! Joe's money doesn't just sit in the bank; the bank must lend it to someone in order to earn money to pay Joe interest. This lending is not 'only a form of spending, it is, Mr. Summers is a member of the staff of the Foundation for Eccnomic Education. in fact, the only kind of spending that actually increases wealth: in vestment. What happens when money is in vested? Say a corporation goes to Joe's bank and borrows money to build a factory. The corporation then spends Joe's money on build ing materials, machines, tools, and labor. The money that Joe has saved winds up being spent just the same as if he had spent it him self. There is no decrease in pro duction and no rise in unemploy ment. It fact, as we shall see, there is an inc'rease in production and a decline in unemployment! Soon the factory is complete. The corporation then proceeds to hire workers. Joe's savings have in creased employment!

How does the corporation hire workers? By offering better condi tions of employment than their competitors. Perhaps the most im portant condition - as far as work ers are concerned - is the level of 291 292 THE FREEMAN May wages. In all probability, the work ers in the new factory have been lured by higher salaries. Joe's sav ings, whether he realizes it or not, have increased the wealth of work ers in a factory he probably has never seen. "You said that savings increase the wealth of ~ll the people. What about the 210 million Americans who don't work in Joe's factory?" Competitive Sidding Consider first the workers in competing factories. If these fac tories don't want to lose their workers to new factories, they had better raise their wages. Joe's sav ings have increased salaries throughout an entire industry! As for workers in other fields, we should remember that most of them are potential factory workers.

If you want to keep your best farm hand from going off to work in Joe's industry or taking a job that has been vacated by someone else who went off to work in Joe's in dustry, you had better give him a raise. Competition among employ ers means that Joe's savings, and the savings of millions of other Americans, raise the wages of all workers. "That is still not everybody! How about people who don't work?" Every man, woman, and child worker and nonworker - is a con sumer. The end of economic activity - saving, factory building, working, and all the rest - is con sumption. We should always keep this end in mind. The higher wages we have talked about would prove meaningless if they didn't result in increased consumption. Joe's savings benefit everyone because the factory, machines, and tools they helped build are designed to produce goods that consumers will prefer to those already being offered on the market. The corpo ration that borrowed money from Joe's bank took a financial risk be cause they think that they can sat isfy consumers better than their competitors. In other words, they hope to give the consumer more for his money. If they fail, then the loss is theirs. If they succeed, then consumers consume more of what they want and thus enjoy a higher standard of living. The consumer - each and everyone of us - is the final judge and ultimate winner.

"Savings seem to be pretty good after all. What should be done to encourage more saving?" Instead of doing things to en courage saving, we should undo things that discourage it. In par ticular, the law itself is probably the greatest hindrance potential savers face. Let us make a brief survey of some of the ways in which the law discourages saving. To begin with, people can't save money they no longer have. Every 1974 THE ROLE OF SAVINGS 293 dollar that goes in taxes is a dollar that won't be saved. Add up all the taxes that Joe pays, and he may find himself withdrawing from, rather than adding to, his bank account. Tax Disincentives In addition to the general level of taxation, several specific taxes are especially discouraging to savers. Corporate profits taxes, capital gains taxes, and taxes on dividends and bank account inter est hit the saver particularly hard and must be taken into account by every potential saver.

High as taxes are, government spending is even higher. The dif·, ference, of course, is "made up" by running fiat money off the govern-· ment printing presses - inflation .. And inflation, combined with other ramifications of overextended gov·· ernment, is enough to give even the most devoted saver cause to re·· think his frugal habits. The saver sees inflation gallop·· ing along faster than legal limits on interest rates. Even though he actually has lost money, in terms of purchasing power, he finds him,· self forced to pay taxes on his "earnings." The saver sees inflation increas ing the paper value of his capital holdings. When he sells his hold ings he must pay capital gain:s taxes - even though his "capital gains," in terms of real wealth, ac tually may have been capital losses. The saver sees inflation increas ing the replacement costs of capital equipment - machines, spare parts, tools - while depreciation allow ances are determined by original costs. He finds that depreciation allowances have become inadequate to pay for new equipment to re place the old.

The saver sees inflation increas ing the paper profits of his corpo ration. In particular, inventory "profits" - the difference between the cost of producing an item and the cost of later replacing it in inventory after it has been sold are a direct result of inflation. Were all these inventory "profits" available for investment in new in ventory, the corporation could at least hold its own. However, almost half these "profits," on the average, wind up as corporate profits taxes. Thus, the saver may find his corpo ration losing money and paying profits taxes at the same time. Inflation itself, even without be ing combined with various govern mental controls and taxes, is dis couraging to potential savers. With prices rising, people are encour aged to make purchases before prices go any higher, rather than to save for future purchases. This brief survey of ways in which the law discourages saving is, of course, by no means complete.

294 THE FREEMAN May However, I would like to conclude with one factor that can never be measured, but which is nonethe less very real. This is the factor of uncertainty. In recent years, the United States government has grown so interventionistic that ev ery few months the president is announcing "strong new" economic measures. Who knows what is next? Already we hear congress men calling for a virtual national ization of oil companies. Who is going to invest under such circum stances? To complete the destruc tion of the American economy, the government does not have to ex propriate the means of production. It merely has to make conditions so onerous and so frightful that no one will dare invest in private en terprise. A free market, and the belief that the market will continue to be free, is all the encouragement savers ever need. ® IDEAS ON LIBERTY Sharing the Gains ALL economic gains must be eventually shared. That is a basic principle of such broad application that it might be called a gen eral "law of economics."

This is not socialism. It is the essence of the free economy. Nor is it "redistribution." It is plain distribution, or diffusion of wealth. It works this way: 1. All business is done by agreement of some kind. 2. The agreements are voluntary. 3. Nobody agrees to anything unless he finds it in some way to his advantage. These add together to make the essential reason why economic well-being is more widely distributed in the United States than it ever has been in any other country. For in a free economy, everybody gets a share of the values other people have to offer. But they also have to share a part of the values they themselves have to offer. HAROLD M. FLEMING The Blessingsof Diversity LEONARD E. READ Were all alike:, instead of free, T'would mean the end of me and thee. THERE is an old wheeze that goes something like this: "The whole world is queer but thee and me, and sometimes I think thee a trifle peculiar." The line affixes a bit of humor to a lamentable fact: most people are addicted to conformity. The truth? Were all like thee or me, all would perish.