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Kasriel's Parting Thoughts - Mary Matlin's Economics

As many of you know, I will be retiring from The Northern Trust Company on April 30. In the few remaining days of my tenure, I will be sharing with you some of my parting thoughts with regard to economics as time permits and the spirit moves me. By the way, after April 30, my Northern Trust email address will disappear into the ether, but I hope I will not follow it there. If you feel the need to contact me after April 30, and I cannot imagine why you would,I have established a personal email address, which has gone live: econtrarian@gmail.com.

Now, on to Mary Matalin. I saw her on one of the cable news shows on Wednesday defending Republican presidential candidate Mitt Romney's planned car "elevator" in his new La Jolla home in terms of job creation. Ms. Matalin argued that by installing this elevator, Romney would be creating new jobs for the economy. How might Bastiat, the 19th century French political economist, have reacted to Ms. Matalin's argument? My suspicion is that he would have made a distinction between what Ms. Matalin "sees" and what is "unseen." Ms. Matalin sees the additional workers manufacturing and installing the elevator. What she apparently does not see are the workers who otherwise would have been hired for some other unrelated project had Mr. Romney forgone the installation of the elevator and rather invested, or saved, these "elevator" funds. Ms. Matalin, a Republican partisan, appears to have bought into the Keynesian fallacy often trumpeted by Democratic (or is it Democrat?) partisans that an increase in saving implies less total spending in the economy and diminished job creation. If Mr. Romney chooses to forgo the installation of a car elevator in favor of, say, purchasing some additional financial assets, in effect, he is transferring some of his purchasing power to another entity - a business, another household or a governmental body - that has a greater urgency to spend currently than does Mr. Romney. So, although Mr. Romney would be hiring fewer workers to manufacture and install a car elevator, the recipient of Mr. Romney's investment funds would be hiring additional workers to produce whatever they were purchasing. (This concept of transfer credit comes from the Austrian school of economics, whose pupils greatly admire Bastiat.)The only way Mr. Romney's decision to forgo the installation of a car elevator would not lead to a creation of jobs is if Mr. Romney chose to increase his saving by holding more bank deposits and/or currency, in which case would result in a decline in the velocity of money.

So, boys and girls, like Bastiat, keep your eyes open. Try to see everything when analyzing economic issues. Ms. Matalin was not incorrect to argue that Mr. Romney's decision to install a car elevator in his new abode would create new jobs. But what she apparently failed to see is that new jobs would have also been created if Mr. Romney had chosen to forgo the purchase of the car elevator and instead invested those funds. Increased saving in general does not result in decreased aggregate spending. Rather, it merely changes the composition of who is engaging in the new spending.


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