As has been said here before, the most important line in Henry Hazlitt’s Economics In One Lesson has rarely, if ever, been referenced. Hazlitt wrote, “What is harmful or disastrous for an individual must be equally harmful or disastrous to the collection of individuals that make up a nation.” It deserves more attention.
Think a recent piece by Harvard economist Jason Furman at the New York Times. Opining about the Trump economy, Furman wrote that “One well-measured component of economic growth is consumer spending, which represents more than two-thirds of the overall U.S. economy. And American consumers have been spending at a surprisingly rapid pace this year, based on a combination of lower-income consumers stretching their borrowing and higher-income ones spending some of their newfound stock market wealth.” He could perhaps be persuaded to rethink his analysis.
Furman misses that consumption is the effect of economic growth, not the driver. That’s why some can consume a lot, but most can’t. We produce so that we can consume, which is a but a reminder that production is 100% “of the overall U.S. economy,” while consumption is yet again the effect. Furman is writing not about the source of growth, but growth that already happened.
As for the so-called “wealth effect,” the economy Furman imagines whereby people just spend their equity gains quite simply doesn’t exist. For individuals to spend “some of their newfound stock market wealth,” there must be a commensurate lack of spending. Markets aren’t all sellers, nor are they all buyers. The mythical “wealth effect” suggests that individuals can extract cash to buy things without other individuals delaying consumption in similar amounts.
Back to Hazlitt, the rest of Furman’s pregnant-with-fallacy commentary can be addressed with “What is harmful or disastrous for an individual must be equally harmful or disastrous to the collection of individuals that make up a nation.”
Hazlitt was reminding readers that economies aren’t living, breathing, blobs, they’re just people. Which is why it’s useful to think about Furman’s analysis through the prism of Hazlitt’s pithy genius.
Furman contends that the economy is presently being boosted by the aforementioned (and mythical) “wealth effect,” along with “lower-income consumers stretching their borrowing.” Stop and think about that. What individual gains from not just living paycheck to paycheck, but borrowing to increase consumption? Hopefully the question answers itself.
Prodigality doesn’t just deprive the low-income individual of the genius of compounding born of saving even little amounts over time, much more importantly it imperils the prodigal throughout time when unemployment reveals itself, unexpected expenses come up, or both. Put another way, “lower-income consumers stretching their borrowing” is bad for individuals, and by extension it’s bad for the economy.
Bringing higher-income individuals back into the equation, Furman’s odd modeling suggests we gain from their prodigality too. Except that there are no companies, no entrepreneurs and no jobs without unspent wealth, and the rich by virtue of being rich have the latter in spades. Which means excessive spending by the poor and rich alike doesn’t just harm their near-and-long-term economic prospects, it harms all our economic prospects given the basic truth that to grow, an economy requires savings.
As always, all of this would be clear if a simple line from Hazlitt’s essential book were better circulated. Those internalizing Hazlitt’s common sense would ideally include economists like Furman who could learn a great deal from non-economists like Hazlitt.
Originally published in Real Clear Markets.
