Economics 103

This is what we read in a U. S. newspaper today. It shows how uneducated we are. The writer thinks he knows a simple solution to the country’s woes . Or should we say, simple-minded.

“Savings … not stimulus checks, are key to sound economy”. That’s how the writer headed his piece and that just about says it all.

“A little more than a year has elapsed”, the writer began, “since the ‘stimulus package’ was enacted into Federal law. However, unemployment remains close to 10 percent. At one time, most people understood that the creation of employment by the government can only come at the expense of the private sector. The government can create jobs, but it can only do so by levying or raising taxes, printing money, or issuing debt. Such actions usually retard employment – the exact opposite of what governments say they hope to achieve. This is because government-created jobs are not tied to consumer demand, but are instead ‘politically mandated.’

“In the private sector, the creation of employment is directly linked to those industries and services that consumers patronize. Furthermore, profitable industries attract competitors, which, to successfully compete, have to hire workers, further expanding employment. Thus, real employment can only come about through the creation of genuine savings. Production takes place over time; workers have to be paid during the process before goods are finished and sold. Thus, savings are required to pay wages as production takes place.

“The greater an economy’s savings rate, the more production projects can be undertaken, and with it more employment. Savings, therefore, provide the means for the payment of wages during the lengthy periods of production. Wage rates, too, are tied to savings. Businessmen compete with each other not only for consumer patronage, but also for employees. To attract workers, businessmen have to offer better compensation than their rivals. The greater an economy’s savings rate is, the more entrepreneurs have to bid workers away from one another. The competition for workers is how wages increase.

“The great enemy of savings is taxation. A heavy tax rate discourages people to save, since they are penalized even further by abstaining from consumption and paying taxes. Higher tax rates, therefore, will make individuals present-oriented. In regard to taxation and savings: it is not the type of tax that is important, but the overall tax burden that affects savings. The greater the burden, the lower the savings rate, which results in lower employment and wage rates.

“If politicians are really concerned about the unemployment rate, they would abandon plans for further unproductive job programs and start enacting serious tax cut measures. Now that is change Americans can really believe in.” –

[It finally dawned on us that what we were reading was the term paper of a first-year economic student. What a shock he’s in for when he comes to the chapter on “supply and demand”!]