Saturday, April 28, 2007

The Importance of Savings

In an a interesting article on the Austrian School of Economics and the Great Depression, the author contends that what is necessary to resolve a depression or large scale recession is to increase savings, allowing for real investment funds to accrue.

The reality of this is clear that with the Depression and after, until the late 1960's, most Canadians were savers. Today most are in debt. Which means that a serious downturn in the economy is going to be a disaster.

However as the author points out the way to mitigate that disaster is by increasing savings. The savings culture that resulted after the Great Depression attests to this. However in that case it was a harsh lesson learned the hard way. And unfortunately in our easy credit consumer culture it is one that is forgotten in this long boom.

Austrian Business Cycle Theory: A Corporate Finance Point of View

The lesson is that as long as output prices stay up (through Keynesian
policies) and the Monetarists keep interest rates from rising (or maybe push them lower), if input prices are rising (a real resource crunch), we will have a recession. And the only way out is through the painful but necessary liquidation process.

The best means to transform malinvestments into viable economic activities is
through increasing savings. This means that one of the government’s most effective
policies is to cut taxes on the savers. Those who are savers are usually labeled as “the rich.” Unfortunately, the prescriptions of “get government out of the market” or a “tax cut for the rich” tend not to be politically popular. However, the idea of “tax cuts are for the tax payers” has had some success.

And while he praises tax breaks for savers he mistakenly identifies them with the rich. Which is currently true, because only a relative handful of the population in the G20 countries have access to liquid capital. The average person who used to save, such as my parents, now has easy access to credit and thus is leveraged into debt. However to have a successful saver economy you need the masses to have access to enough surplus cash to encourage saving.

Savings by the wealthy elite while larger than the average persons, are not nearly as effective as a mass saver culture, as witnessed by Japanese savings numbers. And while various explanations are given for Japan's long recession, the reality is that what kept it from flat out crashing as bad as the Wall Street Crash of 1929, with the same global impact, was the savings accrued by the average Japanese.

The way to solve this problem of easy credit, and its recessionary effects on the business cycle is not to expand capital gains tax breaks, or give business tax breaks, or even to encourage investments in RRSPs or Income Trusts, but rather to eliminate all taxes on incomes of $100,000 or less.

The real savers, the folks who saved capitalism according to the Austrians, are our parents and grandparents who were cruelly forced to learn this lesson, to save in order to survive.

In order to encourage individual saving in a credit card debt based consumer economy, tax cuts, not tax credits, are required for the working class. Currently tax breaks for most folks put anywhere from a few hundred to a couple of thousand dollars back in their pockets come tax day, which is Monday.

Now imagine if you actually had the income tax from your income, you could invest in saving. Instead of a paltry hundred or even a thousand bucks this could be anywhere from $5000 to $10,000 to as high as $25,000 annually.

Further if EI were run as a joint investment cooperative between Employers and Workers, without the government plundering it for it's surplus costs could be reduced, And with a profitable investment strategy put more money in workers pockets, while also insuring a better and fairer process for collecting EI. This has already occurred with the CPP. Ironically it is the NDP and the Bloc who support this idea of joint ownership and elimination of the government from EI.

Furthermore such a joint cooperative EI program could offer alternative financial opportunities such as micro credit for self employment opportunities, as well as the usual Guaranteed Income that we associate with EI currently. It would allow for broader education and training opportunities, while not costing as much as the current program does, because the government would not have access to the profit, surplus.

Similarly we should eliminate Workers Compensation Boards and replace them with a joint labour employer cooperative, that would not have the government as its arbitrator or with its hands in the pockets of workers and employers as currently occurs.

A failure to come up with adequate support for an injured worker, would result in the option of the worker to sue the employer in civil court, which is currently not available with the state as the arbitrator. WCB payments would then decrease under such a joint management and investment plan.

It is often argued that labour relations is problematic because it is an adversarial relationship between workers and employers, unions and corporations. While this is true, the real advocate of this adversarial relation is the state who wishes to arbitrate between the two parties. Unions are the working classes voice in labour relations with the bosses and their associations and cartels. The state is never neutral, as we saw with the recent CN strike. It interferes in the natural social relationship between workers and their bosses.

In fact one has to ask why we need the government period. We have common laws, we have workers and employers, and they can resolve their conflicts through negotiations, arbitration, strikes, or mediation. They can cooperate as well for mutual aid and benefit, such as with works councils, joint management labour pension and benefit funds, EI, Workers Compensation, etc. The State is not required for a cooperative commonwealth.

As Samuel Gompers pointed out long ago;

The worst crime against working people is a company which fails to operate at a profit

The more thoroughly the workers are organized and federated the better they are prepared to enter into a contest, and the more surely will conflicts be averted. Paradoxical as it may appear, it is nevertheless true, that militant trade unionism is essential to industrial peace.

What we have endeavored to secure in industrial relations is industrial peace. When industrial justice prevails, industrial peace will follow. It is a result and not an end in itself.

We want a minimum wage established, but we want it established by the solidarity of the working men themselves through the economic forces of their trade unions, rather than by any legal enactment. . . . We must not, we cannot, depend upon legislative enactments to set wage standards. When once we encourage such a system, it is equivalent to admitting our incompetency for self-government and our inability to seek better conditions.

To strengthen the state, as Frederick Howe says, is to devitalize the individual. . . . I believe in people. I believe in the working people. I believe in their growing intelligence. I believe in their growing and persistent demand for better conditions, for a more rightful situation in the industrial, political, and social affairs of this country and of the world. I have faith that the working people will better their condition far beyond what it is today. The position of the organized labor movement is not based upon misery and poverty, but upon the right of workers to a larger and constantly growing share of the production, and they will work out these problems for themselves.

It is not the organizations of labor which take away from the workers their individual rights or their sovereignty. It is modern industry, modern capitalism, modern corporations, and modern trusts. . . . The workingmen in modern industries lose their individuality as soon as they step into a modern industrial plant, and that individuality which they lose is regained to them by organization--they gain in social and industrial importance by their association with their fellow workmen.

Also See:

Not Your Usual Left Wing Rant

State-less Socialism

Fair Share

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