Dear Dr. Luckey, I realize that savings is good for the individual—for contingencies, vacations, retirement—but why is it good for the nation as a whole?

This is an excellent question, and one which very few people ask themselves, or know anything about. John Maynard Keynes, an economist whom I have roundly criticized in these pages, believed that there was a “paradox of thrift,” that is to say, that savings pulled money out of the economy, so that the things which companies planned to make would not be sold, people having saved money that should be spent on consumption. This would cause continued economic recession as companies would have unsold goods, would have to lower prices, and would lay off employees. This process would continue year after year, unless the government would, by deficit spending, put extra money in the hands of the consumers to offset the savings. This is utter nonsense, but has suddenly become popular again since Obama was elected to the presidency. Look at the media coverage of Christmas time—retail sales, this; retail sails, that. It is as if the whole country depended on retail sales.

Let us go back in time in the production process and ask ourselves where the consumer goods came from in the first place. St. Thomas Aquinas pointed out that what is first in intention is last in execution. In economics, this means that the desire to have and provide a consumer good is the last stage of a process that brings into existence resources that were not necessarily related before. These “higher level” goods include things like taking iron ore out of the ground, which no one would do just because they were bored, but they would do if they were paid for doing it, because the ultimate goal of the ore is the frame of an automobile, or some such consumer good. It includes transportation, factories, machinery engineers, machinists, and on and on. 
If a nation spent all its money on consumer goods today, what would they have left for tomorrow? Nothing. This means that in order to have consumer goods in the future, we have to have capital goods, goods used to produce consumer goods in the future, today. The capital goods are those mentioned in the last paragraph. On the face of it, money must be spent just to keep the current stock of capital goods functioning at current levels, providing the same amount and quality of consumer goods coming tomorrow as we had today. That means something has to pay for the wear and tear of the equipment, and replacement when something is no longer functional. This is called depreciation and purchase of new equipment to replace the old. This also applies to people. Workers retire, die, move to other jobs, need retraining, etc. It costs money to replace and train workers, and this must be done all up the line, back to the iron mine. Where does this money come from, consumption? Well, certainly companies use most of their profits, if they have had any, to do all this equipment maintenance and personnel replacement. That is corporate savings. But frequently, the company has to go to the capital markets, i.e., the stock and bond markets, and banks, for money for this purpose. Where does this money come from? Our SAVINGS! 

When you save money in a commercial bank, or put money in corporate bonds, you make that money available for companies to borrow. When you buy stocks, a company can get money from an investment bank based on the current price of their stock, which will form the basis for an initial purchase option, where the bank will give (not lend) the company money based on the probable price they will get offering new stock on the market. So this all comes from savings—your savings and mine. No savings—no replacement of aging equipment and personnel.

But, there is more. Competition between companies in the same industry forces companies to update and improve their products. If Company A sits back and relaxes, content merely to replace their equipment and current employees if they leave, another competitor, Company B, in its attempt to get more sales, will spend money, first on research and development of new and improved products, and once tested, it will spend money on the production of said products. Company A knows full well, unless their leadership is incompetent, that they have to do the same or go out of business. Where do Companies A and B get the money to do this? SAVINGS. How do these companies get you to save? They do so by promising a return on your savings. Take a bank, for instance (don’t really take a bank—you’ll go to jail). If you put your money in a savings account, you are promised, say, 5% interest. The bank lends that money out to a company expecting, say, a 10% return. The bank keeps 5% and gives the other 5% to its depositors. If you buy a corporate bond, you are lending the company money at a promised return. If you buy stocks, there is no guaranteed return, and that is why research of a company is necessary prior to buying stocks. The purchaser, or his broker, must take an educated guess, based on past history and current prospects, as to what the future stock price will get to over a certain time, in order to make the purchase worth while. All of this is done with savings.
Well, how do taxes affect the savings picture? Taxes reduce the amount you and companies have available to save. Since the American government never saves anything, but is in an $11.6 trillion-dollar debt, national savings is in negative territory. In addition, our propensity to consume on credit means that we have no private savings. Since 1983, the citizens of this country have reduced their savings rate from about 11% of their income, to about -3% in 2006. We are dissaving. Now much of this occurs because taxes are eating up our salaries, so just living at a constant level of comfort is becoming more expensive. Also, inflation, caused by the government’s expansion of the money supply and deficit spending, causes prices to rise without any increase in productivity. I believe that our tendency to go into private debt is caused by these phenomena. Take my case, for example. We were well off but by no means millionaires. But my dad gave me the checkbook when I had to pay tuition at my private  Catholic university, and would just ask me what amount I wrote the check for. I never had to take out a loan, nor did I have to have work-study. Who can do that any more?

Savings is important in your life. The more of your income you spend now, the less you will have to live on during retirement. The more you save now, the better you will live in your retirement. Things like Social Security tempt people not to save for retirement. I used to sell retirement plans. So many people told me that they did not need any retirement plan because Social Security will take care of them.  Those clients of mine who are still alive, if they did not heed my advice, are probably on welfare today. 

God expects us to use our heads to provide for ourselves. It is true that the success of our plans depends totally on God, but we are expected to have plans and carry them out in the first place.

This reminds me of a cute joke illustrative of this point. There was going to be a great flood in the midwest United States, and there was a man sitting on his porch. A National Guard jeep came by and the soldiers in the jeep tried to persuade the man to go with them. But he replied: “God will save me.” Well, then the flood waters were up to his second story window when a National Guard boat came by and tried to get him into the boat. He replied: “No, God will save me!” Finally, he is sitting on the pinnacle of his roof and a National Guard helicopter comes and throws him a line. He rejects the attempt to save him, saying again: “God will save me.” The man drowns and goes to the judgment. He says to God, “I had such faith in you, why didn’t you save me?” God replied: “I sent you a jeep, a boat and a helicopter; what more do you want?”
 
Dear Dr. Luckey,
As I understand it, the total national debt is now $9.6 trillion.  How did that happen, and what are the implications of this enormous debt?


When a credit card company gives you a credit card, they give you a credit limit with it.  This limit is based on your current debt, current income and the likelihood that you will be able to make the payments.  So, if they give you a $500 credit limit, that means that you either have a low income and/or very little credit record.  If they give you a $25,000 credit limit or more, that means the opposite of these.  In any event, there is a limit as to how much you are able to charge.  If you could raise your own salary to meet your credit obligations, there would be very little problem with a credit limit, because if the payments got too difficult, you could merely give yourself a decent raise.  But suppose that the credit card company allowed you to raise your own credit limit, and would ask no questions.  With this, suppose the credit card company would let you pay more or less whatever you wanted toward the debt.  Well, you thought I was crazy before, now you see clearly that I need to be sent to the funny farm.  What company would ever do that?  The answer--none!

There is a good reason why this would never be done.  Despite popular opinion, money does not grow on trees.  Wealth actually has to be produced, and that is done by production.  Productivity increases—wealth increases.  Credit is based on an estimate of increased productivity, and therefore, increase of wealth in the near future.  Giving credit with no increase in productivity in sight is like flushing it down the toilet.

But this is how the Federal government actually acts toward money—your money.  The Founding Fathers rightly prohibited an income tax in the Constitution.  But in 1913, the wool was pulled over the eyes of the American citizens and they approved an amendment to the Constitution approving such a tax.  I asked my grandmother (who was born in the 1880’s) why people fell for such an idea.  She said that the promoters promised that the tax was only going to be ½ of 1% and it was only going to apply to the very wealthy, like J. P. Morgan and others like him.   Who could resist?  The government could have more money for a slight tax on the super-rich.  Well, this lasted a year or two and then year after year it crept up to what we have today.

But, you say, that explains only the big Federal spending spree that has been going on since 1913.  It doesn’t explain the debt.  

Good insight.  It is in everybody’s self interest to try to get something for nothing.  If you see something at a yard sale for $.10, and it is something you’ve been looking for for years, you consider it a steal.  But it really is not.  The person selling it doesn’t want it.   You lucked out, and so you should rejoice. 

The government does a similar thing.  They sell services for votes. A vote is not worth much economically, maybe one trip to the voting place, or maybe two a year if you vote in the primaries.  In exchange, you get police, fire protection, free schools, protection from foreign enemies, welfare, Medicare and Medicade.  But wait, you say, I have to pay for those, don’t I, with taxes?  True, but here is where what Hayek calls the “fiscal illusion” comes in. In exchange for the services you receive, the cost is spread out over those who receive, and those who do not receive, the services.  Public schools, for instance, are paid for by everybody:  childless couples, single people, those sending their children to private schools and already paying tuition, home schoolers.  So you are not paying dollar-for-dollar of services.  Also, to keep the taxes down, the government does not pay for all of it either.  Every year the Federal government spends much more than it takes in, in order to be able to buy votes yet avoid a tax revolt.  It borrows money and even prints money to pay its bills.  This means that the real cost of government is no where near what you pay in taxes.  It is estimated that the Federal government this year will spend nearly $400 billion than it takes in in taxes.  That means that you received 16% more in services that was paid for by taxes, and the rest was paid for by borrowing and/or printing money.  This debt accumulates every year, and no one has the will power to do anything about it, despite the cries of economists and outraged citizens.

Who is going to pay all those bonds when they are due?  You, your children and grandchildren.  Debt service, i. e., the repaying of the bonds runs about 19% of the Federal budget each year.  It will increase as the larger deficit bonds come due.  This is like you paying 19% of your income on paying off your credit cards, but the amount you borrow each year increases.  So if you net $30,000 per year, you are then paying $5,700 to credit cards with no end in sight.  This also means that you buy substantially more than $30,000 in stuff each year.  If this in very imprudent for a citizen, why should it be permissible for the government to do it?  

 
Dear Dr. Luckey, I am a well educated Catholic down in the economic trenches as it were, working for nearly twenty years in accounting. I received my BA from Thomas Aquinas College where I was first introduced to Catholic Social teaching on Economics. I have read a decently large scope on the subject over the last several years from Capitalism to Communism to Distributism. For the last several years I have been in Healthcare at a for-profit hospital that is part of a large hospital chain as one of the head bean counters, and I have been trying to figure out just how to solve the growing economic disaster that is looming in healthcare. What do you think could be done to improve the healthcare system in this country along the lines of Catholic social teaching?

You ask an interesting question about how to prevent the looming economic disaster in healthcare in the United States.  However, your question is much too vague.   What I can do is to give some aspects of the financial problem.
Is there a Catholic social teaching side to the financial aspect of healthcare?   As followers of Jesus Christ, we all want to see people get “adequate” health care.  But the first problem we encounter is, “How much is adequate?”  The United States has the best health care system in the world.  Medical care is much more available and of more high quality than when I was young.  In those days, a diagnosis of “cancer” was a death sentence for most people.  Not so today.  Preventive medicine is much more widely practiced than ever before.  On-site trauma care, as well as emergency room procedures, is absolutely astounding.  Lastly, the law in most jurisdictions requires that patients, who call an ambulance and insist on being taken to the emergency room, must be taken and treated as least until they are stable.  This has given rise to what paramedics call “frequent flyers,” those without health insurance who go to the hospital for colds, headaches and the like.

Unfortunately, as one famous economist said, “There is no such thing as a free lunch.” Every bit of service must be paid for by someone.  The “frequent flyer” trips to the emergency room are paid for by the paying patients of the hospital and their insurance companies (meaning higher premiums passed on to the consumer).  Like every other thing, the price of a medical service is auctioned off to those who want it most, i. e., to those willing to pay the most.  This is because medical care is a scarce good—scarcity meaning that our desire for it would never be satisfied, not because there is not really enough.  Since it is scarce, it needs to be economized. 

But more and more people claim the right to get the best, high-tech treatment the system can offer.  If you have insurance or can pay out of pocket, you can have it.  If not, you have to do without.  This is not much different than a poor man who would like to drive to work in a nice, reliable BMW, but keeps a 1970’s AMC Gremlin alive because he has little money.  How much health care is he entitled to if he cannot afford the higher level stuff?  How much health care is he entitled to if his medical conditions are caused by his lifestyle choices, like smoking, too much liquor, fattening foods and no exercise, or his failure to take his $6.00 per month high blood pressure pills which then results in renal failure.

The question is, then, how do we help those at the bottom?  The first thing is that Catholics, who are notoriously stingy, need to open their pockets to support clinics which give poor people medical care.  Secondly, there are already government programs in place which pay for some care, like Medicare and Medicaid.   The poor need to be aware of these.  Medical savings plans are a new and interesting development.  If when you are young and healthy, you get one of these and save up, when you are older, you will have money socked away for the bigger expenses.  Physicians need to get back into the habit of volunteering some time at clinics, and the trend to more low level health care providers, such as physicians assistants and nurse practitioners need to be expanded.  More medical schools would lower the physicians’ income through competition, and therefore the cost of treatment.  Lastly, tort reform (don’t get me started).

These are some things that point to a solution.  Socialized medicine is a false solution, but I’ll have to save that for another day.   Meanwhile, there is no quick fix. Maybe we should focus on really desperate areas like Africa, where in some places there is no health care at all?