“What is harmful or disastrous to an individual must be equally harmful to the collection of individuals that make up a nation.” – Henry Hazlitt
The conceit of economists continues to astound. They literally think they can measure the infinite actions taking place every millisecond in order to make their country, and not infrequently, world economic projections. If you doubt the latter, just Google “world recession.” Paraphrasing the great Christopher Buckley, your computer will explode.
More realistically, economics is about the individual, period. The only economics is micro, the study of the individual. Nothing else matters.
It’s something to keep in mind as the “Sahm Rule” gains currency yet again. It’s named after former Federal Reserve economist Claudia Sahm, who gained name recognition several years ago for predicting an economic outcome that almost certainly had nothing to do with prescience, and everything to do with the old saying about stopped clocks. And that’s not a knock on Sahm as much as it’s a comment on a profession pregnant with conceit about an ability to measure what authoritarians long thought they could centrally plan. In short, the problem isn’t Sahm, it’s macroeconomics.
To see why, consider Washington Post columnist Heather Long’s description of the “Sahm Rule.” Long writes that “when the unemployment rate rises to at least half a percentage point above its low point in the past year, a recession has begun.” Long adds that “the rule is based on the idea that, when people start losing jobs, they cut back on spending, and this causes job losses.” Hopefully readers can glean from the description the problem with the Rule.
It glosses over the truth about economies and the individuals who comprise them. That’s the case because broken down to the individual, one can easily see that what causes Sahm discomfort is bullish for the individuals who comprise the economy.
In Sahm’s case, the visual is the reduced spending that is said to cause job loss. Of course, not seen by Sahm is that no individual could ever be harmed by too much saving. Implicit in saving is perhaps fear of the future, but the act of saving is the clear act of improving one’s individual future.
To which Sahm and other economists might blanch given their belief that consumption is the driver of all economic growth. In their models, saving subtracts from consumption. Except that it doesn’t. No act of saving ever subtracts from demand, as much as saving shifts unspent wealth into other hands. Does Sahm really think those banks the Fed regulates rent the money from savers just to stare at it?
In which case, the act of enhanced individual saving that harms no saver results in greater access to savings for those with near-term consumptive desires, but also the individuals and businesses eager to invent the commercial future, expand on an existing commercial idea, or both. Savings that improve the economy of the individual also improve the odds of other individuals to vastly improve the present and future through health, transportation and technological advances that can’t be discovered absent the very savings that Sahm, her Rule, and economists more broadly disdain.
Which is worth remembering as Sahm’s thinking gains traction based on something as unreliable as an unemployment report. Sahm touts her Rule as a forward-looking indicator of recession, and useful as a way of seeing around the corner before “it’s too late for the Fed’s tools to work.” And the Fed could do what?
Furthermore, the joke’s on Sahm. Precisely because increased savings are good for the individual, readers can rest assured of what’s true: if there’s an economic slowdown that reveals itself through more saving, the latter is the obvious fix for the sluggishness as precious funds are matched with future progress over consumption of the present.
Republished from RealClear Markets
