Economic Recovery; B. Summers

Brian Summers Economic Recovery AMERICANSare once again hoping for an economic recovery. If recovery comes, can it be sustained? Or will it soon collapse, as have all recent upturns? The answer depends on how the recovery is financed. If economic re covery is financed from the real sav ings of the American people, a sus tained period of economic growth may occur. But if the recovery is in duced by an artificial expansion of banking credit, any upturn will .quickly abort. To see this, we need to understand the difference between saving and credit expansion. Perhaps a simple example will make the distinction clear. A businessman has been thinking about building a new factory. But every time he adds up the costsMr. Summers is a member of the staff of The Foun dation for Economic Education. construction, equipment, wages, in terest on the needed loan-he de cides that the factory is too expen sive.

Suppose, however, more savings become available for investment. The rise in real savings may result from a tax reduction which removes some of the penalties placed on savers. Or more savings may become available due to reduced borrowing by the various levels of government. In ei ther case, interest rates decline, not because more money is added to the economy, but because existing funds are shifted from consumption to sav ing. This shift, in the long run, bene fits all Americans. The businessman benefits because lower interest rates mean he can now afford to build his factory. The con struction company and suppliers benefit because they receive new or43 44 THE FREEMAN ders. And workers benefit because the factory creates new jobs. But the real beneficiary is the buying public. The businessman builds his factory because he thinks he can produce goods that con sumers will prefer to those being of fered on the market. He takes a fi nancial risk because he thinks it will enable him to satisfy consumers bet ter than his competitors. If he fails, the loss is his. If he succeeds, con sumers get more of what they want and thus enjoy a higher standard of living. The consumer-each and ev ery one of us-is the final judge and ultimate winner.

The key to real growth, therefore, is to increase the amount of savings available for productive investment. If the savings pool is allowed to grow-without being choked by tax increases, government borrowing, or other hindrances-a sustained eco nomic recovery can get under way. Unfortunately, in previous reces sions the savings pool hasn't been permitted to grow. Taxes haven't been cut and government borrowing hasn't been' reduced. Instead, the Federal Reserve System has re sorted to credit expansion. It has tried to induce artificial recoveries by in jecting new paper money into the banking system. To the casual observer, these new funds seem no different from money that has been saved. Businessmen borrow these dollars, use them to expand their operations, and hire more workers. For a while, the econ omy appears to recover. But there is a fatal difference. The Federal Reserve action does not shift funds from consumption to saving.

Instead, new money has been cre ated. As the new money works its way through the economy, prices are bid to higher levels. Rising prices cause longterm interest rates to climb, as lenders come to anticipate a depreciating dollar. With inflation heating up and in terest rates on the rise, the Federal Reserve finds itself in a vicious spi ral. Credit expansion causes prices to rise, and the only way to stay ahead ofrising prices is to pump more and more credit into the banking system. Before long, prices are rising at double-digit levels, interest rates are soaring, and the banking system is overextended. The Federal Reserve has little choice now but to tighten credit, break the "inflationary psy chology," and plunge the economy into another recession. This, then, is the decision we face. Do we reduce taxes and cut govern ment borrowing, thereby expanding the savings pool and permitting a sustained economic recovery? Or do we try to induce yet another artifi cial recovery through credit expan sion, and reap· the whirlwind when it collapses? @ RussellShannon Constitutional Restraints, the MarketEconomy, and Indiv'idualFreedom He sat at a table, and the light of his lamp fell on the copy of an ancient document. He had marked and crossed out the contradictions in its statements that had once been the cause of its destruction. He was now adding a new clause to its pages: "Congress shall make no law abridging the freedom of production and trade. ... " -Atlas Shrugged!