

Keynes maintains that sometimes people want to hoard money instead of saving it. When this money is withheld from investment, the result is unemployment which, in turn, causes overproduction. Unemployed people are not able to buy the previous output of products and depression results. According to Keynes, there will be an absence of savings during a depression as people withdraw money to survive. He goes on to say that (1) without savings there will be no investment; (2) without investment there will be no employment; (3) without employment there will be no spending; and (4) without spending there will be unsold goods.



Keynes explains that savings can overshoot the demand for investment in capital equipment, resulting in excess savings and the withdrawal of funds from circulation and from the necessary sufficient demand for goods. Drawing money away from the purchase of finished commodities makes them less profitable at the very same time that firms are seeking to set up additional capital resources to produce finished commodities. Keynes maintains that a deficiency of purchasing power is inevitable, resulting in an increased supply of, and a diminished demand for, products. As a result, profitable production cannot be continued and crises and depression begin. Keynes's solution for preventing or alleviating depressions is to either reduce the amount of savings or to stimulate consumption through government spending and/or the issuance of new money.



Keynes says that in a free market interest rates fail to perform the function of a market clearing price and that wage rates do not adjust. The result is underconsumption and unemployment in an unregulated economy. As a cure to bolster consumption, he proposed state management of the money market to supplement fiscal policies with respect to taxation and government spending.

Economic Recovery Requires Savings and Capital Accumulation In a recent two-part article posted in his blog, economist George Reisman explains that the economy is not functioning correctly because it has lost capital which is accumulated on the underpinning of savings. He observes that recessions stem from the effort to build capital on a foundation of credit expansion rather than on savings. Such credit expansion causes overconsumption and the loss of capital due to bad investments.



The housing bubble is a prime example of overconsumption and bad investments caused by credit expansion as many loans were made to "homebuyers" who were not worthy of the amount of credit involved. Although the houses represented capital to the homebuilders and to the financing banks, they did not represent wealth to the unworthy "purchasers" who had not contributed comparable wealth and capital to the economic system and who had no realistic possibilities of doing so. To add to the problem, many of these people borrowed using the increased market value of their homes as collateral and then spent what they had borrowed. Their consumption came at the expense of capital that had been invested by others in the economy. When the housing bubble burst and house prices fell drastically, the effect accentuated the losses experienced by lenders as people abandoned their houses, thus requiring the creditors to lose by the amount of the decreases in the prices of their houses. This loss of capital is what caused a large decrease in the amount of available credit, resulting in bankruptcies, unemployment, and decreased consumption expenditures. Lenders currently do not know which prospective borrowers to trust due to the problems of the capital markets that accompanied the bursting of the housing bubble.



Reisman explains that economic recovery requires that the economy rebuild its stock of capital, and that doing so necessitates greater savings relative to consumption. Greater savings and the accumulation of new capital are needed to make up for the losses brought about by credit expansion and the overconsumption and bad investments that stemmed from it. Government Spending Does Not Bring Prosperity He emphasizes that the use of stimulus packages will result in the additional loss of capital. A stimulus package begins with the consumption of already produced wealth that is a component of the capital of the business that owns it. The money received by the company does not come from the production of any corresponding comparable wealth on the part of the government or by those to whom the government has given the money. When the good consumed by a non-producer is replaced, the result is the consumption of some of the firm's assets. In turn, the replacement production is followed by additional consumption. Each succeeding act of production is accompanied by new consumption that is equal to it. It is clear that real economic recovery requires increases in production that exceed increases in consumption. Stimulus packages only aggravate the problem of the loss of capital that is the fundamental cause of economic recession.



Government demand-management policies aimed at stimulating economic activity do not and cannot create any new wealth—economic stimulants will not succeed. Government stimulus proposals are illogical. The government cannot inject money into the economy without first removing it from the economy. The government can distribute funds only by collecting more taxes, borrowing from the private sector, or printing additional money. There can be no stimulus if the government increases the ability of some people to spend by decreasing other people's ability to spend. When a government taxes or borrows it simply transfers spending power from private owners to political spenders.



By taxing people who create real wealth, the government impairs the process of wealth-generation and diminishes the likelihood of economic recovery. In addition, people who lend money to the government preempt the private-sector uses toward which that money could have gone. Furthermore, when the government prints money the result is inflation which, in turn, leads to hesitant businessmen and entrepreneurs and continuing capital decumulation. The additional "profits" due to inflation are taxed as though they are true profits thereby impairing the ability of companies to replace their assets. All of this results in a less than zero-sum game because government handouts are likely to be less productive (or even counterproductive) and because money distributed by the government is always less than the money collected, since government employees such as tax collectors and dispensers have to be paid. On top of all of this, a stimulus plan will devalue United States currency. Stimulus: Euphemism for Deficit Spending A stimulus package requires the federal government to go further into debt, creating a burden on future generations. New debt has to be repaid with interest through taxation in the future. Government budget deficits cause a continuing depletion of production and output because of the stimulated detour into consumption. Every dollar spent from government securities issued to fund a deficit is a dollar that will not be invested in a private company.



Increased government spending will transfer more of the American economy to the public sector thereby raising the burden of government on America's citizens. On the other hand, if the government reduces both taxes and spending, more money will remain in the hands of private individuals who constitute the productive sector of the economy.



A recession is a time period during which businessmen need to recognize and correct their past errors. A recession comes about due to the effects of the great amount of unproductive debt that financed a multitude of unwise ventures such as loans to homebuyers who were not creditworthy. Through the Community Investment Act, the government required banks to make many such loans to accommodate local community groups. This resulting debt burden should be reduced through bankruptcy proceedings, write-offs, rescheduling, and so on. True Wealth Creation Economic recovery requires that the stock of capital be rebuilt in the economic system. Markets will need the freedom to adjust to slow conditions through price and wage rate reductions. In addition, unsound investments should be sold off. There should be no bailouts and the assets of the mortgage giants should be liquidated. Allowing some businesses to fail and others to begin would provide an incentive to redirect capital into more productive and profitable uses. True entrepreneurs do not request nor obtain government assistance. When a failed or faltering business is rescued by a government handout, it is no longer a business. Likewise, when a businessman obtains his results by receiving special privileges such as subsidies granted by the government, he forfeits his status as a businessman.



Government intervention prevents the efficient functioning of the market. Increasing government involvement makes the investment climate riskier and reduces the motivation of entrepreneurs to innovate. Because of the integration of all individual markets into one functioning system, the reality is that government does not have to be concerned with artificially stimulating demand. Markets clear if not interfered with.



Government efforts to stimulate the economy via direct spending and efforts to stimulate consumer spending are counterproductive. When the government spends, it must expropriate money from businesses to do so, thus ensuring a misallocation of resources. Government should get out of the way by reducing taxation, spending, regulations, and government control of money and the interest rate.

