The Roots of Our Economic Trouble

Ever since the election, most of the talk in the nation has been about the “fiscal cliff.” Listening to it, you would think that whether the economy gets better or goes off the cliff and crashes depends on small adjustments in tax rates and a minimal change in our enormous annual budget deficit.

The fact is that no matter what the politicians do about tax rates and the size of the deficit, it won’t have any effect on the roots of our economic trouble. As long as the federal government’s mammoth size and appetite for wealth are suffocating the economy, growth will remain slow and unemployment high.

To understand why, we need to get down to some economic fundamentals.

Goods and services that we want do not miraculously appear. They have to be produced. How much we can produce depends on how well we use the limited resources available to us — land, labor, capital. Robinson Crusoe on his island had to figure out how to best allocate his time and energy, how best to use the land, and how best to employ the tools he managed to salvage. He knew that if he wasted his time, made bad use of the land, or let his tools rust away, he would suffer the consequences by having less to eat, less to wear, less shelter, less security, and so on.

Thus, his standard of living depended on making the optimal use of his limited resources.

Things are no different when we are talking about a collection of people, even a huge nation. The standard of living depends on how well or how poorly the people use the resources available to them.  In countries where the people are left free to decide on the best uses of their resources, they will prosper. Hong Kong is a good current example. America of the 19^th century was another. Government absorbed and directed very little of the resources. It interfered hardly at all with people’s incentives to produce.

On the contrary, in nations where the government absorbs and directs a lot of the resources and interferes widely with people’s incentives, the standard of living will necessarily be lower than otherwise. Rulers (elected or not) will use land, labor, and capital for their purposes. The more they do so, the poorer the people will be, because political decisions tend to be short-sighted and if they turn out badly, the loss falls on the taxpayers, not on them.

Growing government means more people working at government jobs, often producing little or no value, except to the politicians and special interest groups. Growing government means more land used (or often kept from use) according to the wishes of the politicians. Growing government means that more capital is siphoned away from the competitive process and allocated according to political pull.

Growing government also means that people will put more of their efforts into trying to obtain favors through lobbying or bribery.

In many ways, government undermines productivity.

The problem is that this cost of government is unseen. The great French economist and philosopher Frederic Bastiat famously said that the difference between a good economist and a bad one is that the good economist considers not just the immediate and visible results of an action, but also the long-run and often hidden results. Americans would be far better off, wealthier but also less fractious, if it weren’t for the relentless expansion of the federal government over the last century, but few of them ever think about the production (and innovation) that has not happened because government obstructed it. The lost benefits are unseen.

We are like a drunkard who has been boozing it up for so long that he has no idea how much better he would feel if he had remained sober. Big government is our perpetual hangover that we’ve come to accept as normal.

Modern “liberals” constantly extol our federal leviathan and want to increase its size and power, but if you go back in time, you find that liberals (true liberals — people who wanted more liberty) understood that government was the enemy of prosperity. French liberals of the 18^th century knew that the lavish spending of their monarchs did not stimulate the economy, but merely transferred wealth produced by the farmers, artisans, and businessmen into the maw of the state, where aristocrats and their hangers-on mostly squandered it. French liberals did not think there was some “multiplier” when Louis XIV built palaces and paid his bureaucrats. They knew that the state was enriching a few at the expense of the many, and making the whole society poorer.

Unfortunately, later liberals figured out that they could control the state and thereby enjoy power and wealth. That was when they turned from liberals into authoritarians and began an ongoing campaign to hoodwink people into believing that government was their friend and protector. That campaign has been extremely successful. Millions of Americans have been conditioned to focus solely on the crumbs the state hands them and never to think that they would live better if it weren’t a millstone around the neck of productive people.

The higher taxes Obama demands that “the rich” pay will mean that they will have less to spend, invest, or donate to charity as they think best. Instead, federal officials will get to decide how to use the funds. Will that trade-off help to restore economic vitality? No. It will further depress it as more resources will be wasted and incentives to produce take a battering.

The Democrats bank on the majority of the people not comprehending how much damage the government does to their prospects for a more prosperous life. Sadly, very few Republicans are any good at explaining that to them.