There are a lot of things about economics that I don't understand. For instance, economists are obsessively concerned with savings, and they promote any government policy that promises to promote savings. This was just pointed out by Alan Greenspan in advocating a national sales tax, but you also run into it from economists as far away from Greenspan as Paul Krugman. (For instance, in his New York Review piece on "The Social Security Scam" Krugman defends the wisdom of building up a Trust Fund as a hedge against the impending retirement of the Baby Boomers, and goes on to recommend more of the same as a prudent hedge against expected increases in Medicare costs.)

But the first confusing thing here is the word "savings" -- what does that really mean? If I put my pennies in a piggy bank I'm saving them for future use -- at least as long as I don't get robbed, and I don't forget where I put them -- but that isn't what they're talking about. Simply taking money out of circulation doesn't do anything for the economy; if anything, delaying or foregoing consumption reduces demand, which slows growth, puts a damper on prices and profits, and ultimately puts people out of work. That may be good for the ecosystem, but that's hardly something that excites economists.

What economists really mean by savings is more like what the word "investment" means: giving your money to a business, in exchange for a promised rate of return or a future claim on profits, so that the business can spend the money on things businesses spend money for. If nothing goes wrong, you can expect your savings/investment to appreciate in value, so that you can consume more (or better yet, save/invest more) in the future. Meanwhile, all that really happens is that you transfer your spending to a business who, economists believe, will spend it more wisely. This leads us to a couple of big questions:

1. Do businesses really spend their money more wisely than individual consumers do?

2. Even where businesses do spend their money more wisely, is this the most efficient way to do so?

The first, at least, should be an empirical question: something that we can go out and measure and answer more/less definitively. (Admittedly, the word "wisely" calls for some subjective judgment; "productively" is a word that economists might prefer, or better than that, "profitably" -- turn the problem into one of counting money, but the story of Midas is just one cautionary tale about such a reduction. Moreover, "profitably" raises more questions: profitable to whom?) I can't answer this, but I can point out that many instances of household expense are not mere consumption: some save other expenses, some may appreciate in value, some make life easier or more productive or more rewarding. Greenspan talked about savings leading to "capital formation," but household spending on durable items like appliances, computers, vehicles, tools, etc., is also capital formation. On the other hand, there are many cases where business spending does not lead to capital formation, or (more basically) to the employment of productive labor. When a company builds a factory and employees workers to produce useful things, that adds meaningfully to our gross product. But when a company merely buys another company it doesn't produce anything, and may actually reduce gross product by laying people off and closing plants, while reducing value by eliminating competition.

Clearly, there are useful things that companies can do that households don't do, such as building factories. The question that I'm raising is how much savings/investment actually goes into making such useful things possible and how much doesn't? I don't know the answer there, but I'd be real surprised if it worked out to be more than 20%. (My first guess was more like 10%, but I hedged because a lot of business expenses are hard to classify. But note that it is very rare when buying stock actually increases the working capital of a company -- in most cases you are just buying from other speculators.) A big part of the reason private investment is so inefficient is that each investor and business only seek to maximize their own gains, and many opportunities to do so are at the expense of other investors and businesses -- or, an even bigger problem, at the expense of labor. From a big picture point of view this doesn't seem to be very efficient -- especially compared to public sector investment. The public sector manages to spend virtually 100% of its funds. The only question there is how wise/productive/profitable its spending is.

In the U.S. at least, government spending has a reputation for being grossly unwise/unproductive/etc. Whether that reputation is deserved is something we can argue about. Certainly there are plenty of instances where the charge is true, but there are also exceptions -- the management of health insurance is one such case. Governments also spend heavily in areas where there is no viable private sector business strategy, such as building roads, maintaining waterways, providing disaster relief. But there is reason to think that regardless of how efficient or not public investment has been historically, it could be made much more effective if guided by better principles. In particular, one of the major problems with public spending at present is the extraordinary level of corruption throughout the U.S. political system.

I'm not advocating a wholesale shift from private sector to public sector business finance, but it seems obvious that there are areas where such a shift would be beneficial. (I also think that we should look into reforming policies that tend to make private sector investment ineffective -- a big topic I can't go into here.) But the current political drift is moving the other direction, toward more and more privatization. This sounds like another pet theory of economists I don't understand, but in one critical respect it fits in perfectly: just as savings is a scheme to transfer money to business, so is privatization. It shouldn't be hard to figure out what all these businesses, sucking up private savings and public expenses, have in common: they are the province of the rich.

One begins to suspect that economists are just apologists for the rich. The political program of the rich is get all the money, and they pursue this program with methodical desperation because they compete not with the poor but with their fellow rich. Most economists, especially the ones you're likely to run into on TV or in the press, happily rationalize this program, often spouting utter nonsense as scientific truth. (An astounding example of this is the assertion that it didn't matter who took control of Russia's businesses, just as long as they were privately owned. Most soon fell into the hands of Russian mafiosi, who proceeded to destroy over a third of Russia's GDP.) At least that's my best theory to account for most of what I don't undersatnd about economics.

When I started this piece, I meant to comment on Paul Krugman's piece on Social Security. By the time I wrote it Alan Greenspan had taken over the news, arguing for slashing Social Security benefits and proposing a national sales tax while decrying the budget deficits that he help create in supporting Bush's tax cuts.

Three more points I want to make about Krugman's piece (which otherwise is level-headed and reasonable):

1. Regardless of its merits (or, I think, lack of) the Social Security trust fund dating back to the 1980s set a very unfortunate political precedent, which was to reinforce the public's idea that Social Security is some sort of trust fund as opposed to a pay-as-you-go welfare commitment. The idea that Social Security could go bankrupt, which is the stick driving the Bush program, depends on the notion that it is funded in advance. (The carrot is the equally fallacious idea that private accounts would generate more benefits.) Without this principle of advance funding: (a) there is nothing to invest (i.e., to feed the rich), and (b) the idea that sometime in the distant future America's voters will decide to stop supporting the welfare of the old and infirm is mere speculation. So I believe that this was a political mistake even if it made economic sense.

2. Krugman has two levels of defense for the trust fund. One is the idea that we should save for the future, which I think is sound policy for individuals -- that at least is the way my mother raised me -- but dubious for the nation as a whole. But the other idea is that we should prepare for forseeable future liabilities by getting our affairs in better order today: in particular, by paying off as much government debt as possible in order to make it easier to face up to future burdens. I don't have a problem with that.

3. Krugman argues that the increase in medical expenses is due to the continuous addition of new medical services, and that this will continue for the forseeable future, thereby increasing the share of GDP that goes to health care and adding to the burden of health insurance programs like Medicare. That's true as far as it goes, but within this macro picture there are systemic distortions of cost and quality of service (mostly denial), and those problems are critical. The only thing Krugman proposes is another trust fund. Much more needs to be done, not the least of which is transparent public funding of medical research replacing the current system of private monopolies.

Greenspan's proposal for a national sales tax is nothing more than an attempt to shift the tax burden away from profits (aka the rich) and onto everyone else. He justified this, of course, by claiming that it would encourage savings and capital formation. It isn't clear to me why he thinks we don't have enough capital, but the more fundamental issue there is whether the rich have enough money, which of course they don't -- they never do. The rationale behind this scheme is that if consumption becomes more expensive (as it does when taxed) people will have more incentive to save instead of consume. That assumes that their consumption is optional, that it can be refactored as savings, and that the difference is significant enough to lead people to change their behavior. But it should be obvious, even to a sheltered banker like Greenspan, that much of what most people spend their money on isn't really optional -- it goes for things like food, shelter, utilities, transportation, communication, basic necessities, most of which instantly become more expensive, if anything leaving less money for savings. Secondly, even among the middle classes, who could afford to save more if they lived more spartanly, there is little eagerness to do so. On the contrary, most of them are deep in debt, and a higher tax burden isn't likely to get them to rethink their lifestyles. That leaves the only beneficiary of this bit of wishful thinking to be, duh, the rich.

Actually, I think that there is a case that could be made for a national sales tax (probably in the form of a VAT, although I would do it differently than in Europe). But that would be as one part of a tax strategy that would be more progressive elsewhere, especially in taxing estates. But that's another story, and it's safe to say that that's not what Greenspan has in mind.