Home » Uncategorized » The “My Spending Is Your Income” Fallacy.

The “My Spending Is Your Income” Fallacy.

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Some people so love that line. Here’s a blogger speaking:

1…if there was one simple lesson that I wished everyone knew about economics… that could explain the essential core…it would be: “My spending is your income”. This simple point, properly understood, explains everything you need to know…

And why is this the magic key to understanding? Because:

2…we are all interconnected and dependent on each other to spend money and buy each other’s goods.

So?

3…if I decide to stop spending money and instead save it, that means some shop is going to suffer a decline in business. If it is steep enough, they may even have to lay some people off. Hence, what seems like being frugal and responsible on my behalf by saving money, if followed by enough people, hurts the overall economy and costs jobs.

So nobody should ever save, ever?

4. This is not to say that we should never save, but rather that excessive saving is damaging.

How damaging?

5…recessions and unemployment. If for some reason a group of people stop spending, the some businesses will suffer a decline in sales. If this decline is large enough then they will have to fire staff and may even close themselves. This has a knock on effect as these redundant workers now have less money and therefore spend less, thereby reducing someone else’s income…The economy slips into a downward spiral…

And what’s the solution?

6. If the recession is caused by less spending causing lower income and uncertainty, then the solution is to boost spending and confidence.

Who will do all this spending?

7. It would be madness for a consumer to go on a spending spree…and…what business is going to invest in this economic climate?

Who can “save” us then, by not saving?

8 …the only one left is the government.

And of course the promises the govt makes are important, too. They give us confidence.

9…if the government guarantees no further cutbacks and launches a program of large spending, then this will reduce the uncertainty in the economy.

Now that everybody is certain, what then?

10. Consumers will no longer hoard money and delay expenses but will return to normal spending patterns. Businesses in turn will expand to meet this demand and thus boost the economy.

But is it good for the govt to have such a huge debt?

11…it will have to be paid back, but that is an action for the boom when the economy is doing well.

And that’s why minimum wage laws are so great:

12…a higher minimum wage leads to increased expense but also increased sales.

What about reducing govt spending on all sorts of programs?

13…proposals to cut social welfare, pensions, raise student fees, introduce a property tax, water charges or any form of tax hike or cutback…all suffer from the same fault that they will leave less money in people’s pockets which will only make the recession worse.

And the epic conclusion:

14. “My spending is your income”.

There should be monuments built with this slogan,

it should be hoisted onto walls

and tattooed onto economists.

Devil’s Advocate. I for one am totally convinced, Dave. My spending is your income. Nobody can deny that.

Smiling Dave: It’s like saying gasoline is what runs the car.

Devil’s Advocate: Well, that’s true, too.

SD: So if a car breaks down, we should put in more and more gasoline until the car starts running.

DA: Now, Dave, you know better than that. Gasoline is but one component, albeit a vital one, for the car to run. But that doesn’t mean every problem can be solved by putting in more gas. I mean, if the gas tank has a leak, putting in more gas won’t really do anything. And most of the time, the problem is not at all related to the amount of gas in the tank, but something else entirely.

SD: What if the car is on fire? Surely pouring on more gas will help that, no?

DA: Are you mad, Dave? The whole car could explode if you do that!

SD: Then what has to be done?

DA: I’d take it in to an expert mechanic I trust and have him look it over.

SD: Exactly. And our expert economics mechanics, Mises and Hayek, proved that recessions and unemployment are not caused by “not enough spending”, ever. BTW, Hayek won a Nobel Prize for it.

DA:  But you agree there is less spending, right?

SD: Yep. But that’s a byproduct, not a cause.

That whole article is flawed from start to finish, because he is “curing” the wrong disease. You know what happens when a patient takes a strong pill that is not related to his ailment.

DA: He drops dead.

So where can one go to understand what really causes recessions and unemployment, and how to cure them?

SD: Good old mises.org. So much material there. And of course my humble blog. You could also do worse than get a free internet copy of Hazlitt’s Economics in One Lesson.

[LATER] DA: Ha, Dave, you can’t hide this time. The author of the article has written a comment here demolishing your whole article. And I quote in full:

Hang on. So after detailing my blog post and my full argument at the very end all you do is shrug and say Hayek and Mises disagreed and that’s all I need. That’s it? You don’t try and address my argument you just say Austrians disagree and throw in a plug for Mises.org. Even by your standards this is a very poor and lazy effort.

SD: My reply:

The burden of proof is on you, to show that lack of spending is the problem, not the symptom. I mean if you are ready to massively distort the economy with scads of govt spending, you need to make a good case, not a mere assertion.

Put another way, you are arguing thus:

1. My spending is your income.
2. Therefore, if you don’t have income, the only possible reason is my lack of spending.

Non sequitor.

I mean, it’s like arguing:
1. If you don’t eat, you will die.
2. Therefore if anyone dies it’s because he did not eat enough.

P.S. Don’t forget to see part two, where we analyze the blogger’s arguments at greater length.


8 Comments

  1. Hang on. So after detailing my blog post and my full argument at the very end all you do is shrug and say Hayek and Mises disagreed and that’s all I need. That’s it? You don’t try and address my argument you just say Austrians disagree and throw in a plug for Mises.org. Even by your standards this is a very poor and lazy effort.

    Like

  2. [Modified a bit to be family friendly]:
    This is the same ‘seen and unseen’ in one of its many disguises. If I save money, I’m not going to sit on it forever, because money is just a means to an end; end being satisfaction of wants and needs through products and services.

    If somebody forces me to spend the money on the baker now instead of sometime in the future on carpenter as I intended, it is a loss to the carpenter. So Mr. Robert Nielsen, slight extension of your logic also leads to ‘My spending is carpenter’s loss of income’. May be you need to tattoo that also.

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  3. Smiling Dave says:

    The burden of proof is on you, to show that lack of spending is the problem, not the symptom. I mean if you are ready to massively distort the economy with scads of govt spending, you need to make a good case, not a mere assertion.

    Put another way, you are arguing thus:

    1. My spending is your income.
    2. Therefore, if you don’t have income, the only possible reason is my lack of spending.

    Non sequitor.

    I mean, it’s like arguing:
    1. If you don’t eat, you will die.
    2. Therefore if anyone dies it’s because he did not eat enough.

    Like

  4. For some reason I can’t reply to Pramod Biradar’s comment, so I’ll put it here and hope he can see it. So yes most saved money is eventually spent, but not when it is needed most. If we are in the midst of a recession, its not much use telling people that money won’t be saved forever and it will be spent in the next five to ten years. That’s as useful as a fire brigade that shows up a week after the fire.

    Dave, you write a bad article and then claim that the burden of proof is on me. If so, why did you bother writing the article in the first place? Don’t blame me for your bad post. I also suggest you look up what burden of proof and non sequitor. They aren’t insults to be thrown out like confetti at anyone who disagrees with you.

    recessions are due to a fall in aggregate demand aka spending. The only question of debate is what causes this fall in demand. Is it because of the government or the irrational nature of the market? Likewise, an economy recovers due to a rise in aggregate demand, the only question being what causes it.

    So the debate is not over whether or not spending leads to recovery, but who should do the spending. I believe the government should and you presumably disagree.

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  5. Smiling Dave says:

    OK, now I see what the problem is. You think everyone agrees with your non sequitor, differing only in the details. Thus you say you need prove nothing, since everyone agrees.

    recessions are due to a fall in aggregate demand aka spending…an economy recovers due to a rise in aggregate demand… the debate is not over whether or not spending leads to recovery, but who should do the spending
    Those points are what you are claiming, and Austrians disagree with all of them. Prove them, please.

    Bottom line, you have not proven the connection between not spending and recessions. “If you don’t eat you die” does not prove “If you died, it’s because you did not eat.” So again, non sequitor, and burden of proof is on you.

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  6. If you reread my post or the quotes you took from it, you’ll see my reasoning. I wrote the post so that I wouldn’t have to constantly repeat myself.

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  7. Smiling Dave says:

    That’s why I write my blog, too.

    Like

  8. me says:

    In the real world people are already spending more than they earn :
    http://usdebtclock.org/
    ~52000 debt – ~8000 saving = ~44000 over-spending
    And spending by the gov does not help either because it adds to the 52000 figure not to the 8000.
    How long do you guys think ppl can spend TWO salaries (44000 is close to avg salary), but earning ONE ?

    Still thinking saving is bad, think again !
    And we can clearly see that in non-flat earth ppl prefer to spend now twice as much rather than in the future.

    Like

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