Thomas E. Woods, Jr., is the New York Times bestselling author of 11 books, including The Politically Incorrect Guide to American History and Meltdown (on the financial crisis.) A senior fellow of the Ludwig von Mises Institute, Woods has appeared on MSNBC, CNBC, FOX News, FOX Business, C-SPAN, Bloomberg Television, and hundreds of radio programs... (Read More)
Well, he doesn’t come out and say so, but actions speak louder than words. We read that Prime Minister Shinzo Abe “urged Japan’s business leaders Tuesday to raise wages for employees, saying the move could help stimulate domestic demand and beat more than decade-long deflation.”
That was precisely Hoover’s policy in 1929-30: urge business leaders to keep wages up while prices were falling — in other words, to give people a raise during a depression. Amazingly, fewer people were hired! Can you believe it?
This policy of stimulating consumption is intended to “stimulate domestic demand.” Of course, if fewer people are employed in the first place thanks to the artificially high wage rates, it’s not clear how “domestic demand” will be stimulated.
Also, take the policy to its logical conclusion. Let’s say consumption is what is needed, as the man on the street believes. Saving is bad, consumption good. Here’s the result:
I buy a shirt. The shirt man takes the money he earns from selling me the shirt and buys some groceries. The grocer takes that money and buys theater tickets. And so on. Note what the shirt man and the grocer do not do: they do not save and productively expend their revenues. They do not pay wages (since that wouldn’t be consumption!), they do not pay business-related bills (again, not consumption), they do not place orders for additional merchandise for their stores (this, too, is not consumption). They just keep spending and spending and spending on consumer goods. The result is simply lower inventories. Meanwhile, capital is not being maintained.
It turns out, then, that the vast bulk of spending in the economy is not consumption (that 70% figure is based on misconception upon misconception) but the gross savings of capitalists as they make productive expenditures along the structure of production.