—by Odysseus
There are three primary reasons why government spending cannot sustain a recovery. 1) Governments are badly suited to prioritize assistance to the segments of an economy that will cause growth. 2) The source of government funds is a net “bleed” on the healthy parts of the economy. 3) Government bureaucracy lacks both the foresight and agility, to target the funds in the places they are needed, when they are needed. Only private enterprise can do that.
Recently, President Obama made statements about how the “private sector is doing fine”, and that the real losses are in public sector jobs, with state and local downsizing. “The truth of the matter is that, as I said, we’ve created 4.3 million jobs over the last 27 months, over 800,000 just this year alone. The private sector is doing fine. Where we’re seeing weaknesses in our economy have to do with state and local government — oftentimes, cuts initiated by governors or mayors who are not getting the kind of help that they have in the past from the federal government and who don’t have the same kind of flexibility as the federal government in dealing with fewer revenues coming in.”
This Keynesian view of the economic universe, while appealing to those either in government or with a firm belief in the effectiveness of government action, simply does not stand up to cold scrutiny. What has come to be called the Keynesian economic viewpoint is an elaborate, delicately balanced series of premises, which are really a tautology. Neither the intellectual beauty nor the complexity of an argument or theory makes it valid. Only its verification upon application to the real world does that. Mr. Obama’s and the government centric economists’ ideas fail because they see the economy as a piece of mathematics and ignore the human element. Industrial era economic philosophy assumes that humans are simply another cog in the machine. Keynes, Marx, and, ultimately, “the New Deal” fail upon application because men, human ambition, dreams or imagination are not cogs and sprockets.
The government centric view believes that all economic activity is equal. That a “job” or business has intrinsic value as part of the economy. To their analysis, a “public school teacher” and a “barrista” at Big Coffee are both workers. They both go to work at certain hours, perform a task during those hours, and are paid a salary for performing that task. They, in turn, use that salary to pay for their own needs and wants. Those dollars flow back into the economy, paying others salaries and into profits of businesses. This is how the economy functions. However, this fails to analyze relative “value” of the work.
“Value” is a human notion, not a fixed point. It is not a “constant” in an equation. “Value” can be expressed in terms of scarcity in that, the rarer something is, typically, the more valuable it is, however, this is by no means absolute. The true definition of “value” is the degree to which something is desired or needed by humans and what they are willing to pay or do, to get it. To most of the people in government, the work of the school teacher has great “value” in that they see education as a “good” in and of itself. They further see the teacher’s work as improving the quality of both the polity and the economy because more highly educated workers are capable of performing more complex and more valuable tasks. They would see the barrista as merely a “service job” and not having as great a worth or “value” to the republic or the economy.
This woefully underestimates the job of the “barrista”. The job of a “barrista” is part of the real economy. It is self sustaining without government assistance. That job will continue for so long as there is a demand and, hence, real “value”. The vast majority of the public has demonstrated that it is willing to devote far more resources to its coffee than to spend any of their own cash on teachers (coerced tax dollars are acceptable in apparently unlimited quantities). Consequently, private enterprise has exploded, providing tremendous wealth, employment, purchasing power, and economic stimulation through “Big Coffee” while “public school education” has become a terminally less successful, poorer performing, ever greater drain on state coffers, stimulating nothing except protected jobs for unionized government teachers. Certainly, the “return on investment” has been continually shrinking since the 1970s, as all measures of education and indirect returns of employability have fallen, though the real dollar cost has exploded.
Rather than the “barrista”, a direct contrast would be the “private schools”. These provide a desired service for willing customers and seem to universally provide a better education with far less resources, older, smaller, less advanced facilities, while paying smaller teacher salaries, requiring but a tiny fraction of the bureaucratic support system that exists in government schools. This is so because they are providing a desired service to their customers without political government bureaucracy as the middle-man. The government version of any activity, other than organized violence, is less successful than its private corollary.
No politician dares admit that the “barrista” expands the economy more than the “public teacher”. However, this is merely a judgment call in their own mind. They are assigning “value”, based on non-monetary principles. The economy does not expand, providing greater resources to the populace, based on a politician’s desires.
Government “jobs” do not expand the economy because they add no monetary value.
MISALLOCATION OF PRIORITIES
This is the first of three reasons why government-dominated economies ultimately fail. Priorities are mis-allocated. In the absence of assigning value based on monetary principles, “value” is assigned by political principles. The priorities of the politician or potentate can never be as incisive, astute, or adaptive as the cumulative effort of society’s individuals seeking to maximize their own best interest.
Government expenditures, by definition, can never truly stimulate an economy or build growth. In fact, they tend to do the opposite. They bleed the most productive parts and members of the economy and subsidize endeavors that are economic failures. They subsidize things to which they have assigned a subjective “value” where there is not a objective basis. Good examples exist in “the arts”. Many sculptures, murals, monuments, paintings, structures, and even poetry are funded or subsidized by various governments. Someone in government has decided that these things have “value” sufficient to be paid for. However, clearly there is no part of the private sector that would have paid for or built these “projects”. The citizenry saw zero or little value in these efforts or it would have already been purchased. Consequently, “public” art is little liked and widely derided to the point of becoming the epitome of governmental capacity to waste money.
Likewise, politicians will decide that some “industry” or company is worthwhile in their eyes, even though it has never achieved economic success. A recent example is Solyndra and the various “green” enterprises that received billions of dollars in government funding, only to fail. The foolishness is that these enterprises were virtually certain failures before the first nickel was allocated. If these technologies were likely to be economically viable, as headed by the specific individuals who were proposing to run them, then private investors would have been leaping upon the opportunity to invest in this profitable new enterprise. That they could not get funded was proof enough that the concept was highly unlikely to succeed.
In short, government tends to support those things which are already deemed failures in the human analysis of “value”. This pernicious tendency towards economic mayhem is compounded by how the government gets the funds it so zealously pours down rat holes. Namely, taxes.
THE GOVERNMENT LEECH
This is the second, but related, reason the government-centric economies fail. It is the very nature of wealth, “value” if you will. The government cannot create wealth or “value”. It gets funds in the form of taxes. Those taxes are taken from those individuals and businesses that are creating sufficient “value” to other humans that they produce a profit of some kind. They are people who have jobs and perform work that adds to the gross domestic product or gross national product. The government gets its taxes by taking money from proven producers of value and uses that wealth to subsidize things that are proven to be economic failures. This applies across the board from the aforementioned “art” or failing businesses (be they green, failing automobile companies or banks) to failing individuals, who do not produce and live on the various iterations of “welfare”. In economic analysis, it does not matter if the person being subsidized with the money taken from producers is unable to work due to disability (real or faked), age or mere unwillingness to work, they are nonetheless “non-producers”. The government is assigning “value” and “priority” to these individuals and businesses, based on factors other than monetary principles. The government bleeds the healthy parts of society to sustain the useless or even the gangrenous. A failing business which is sustained by government continues to occupy market space even though it is non-profitable. It ties up workers, real estate, materials, and some customers, which would otherwise have been recycled into a better run, more needed, more “valuable” business that was capable of producing profits. These tax-fueled zombies displace a potential business that would have been a net contributor rather than a drain. All because a politician assigned subjective “value” rather than letting it move to its actual monetary “value” level, as determined by its ability to provide something that other humans need or want.
Perversely, if the government wanted to give funds in a fashion that would stimulate economic growth, it would target those funds to successful businesses and wealthy individuals, who have proven their ability to produce and expand the economy. Since this is both politically and morally indefensible, it is best the government simply do no harm and neither support the failing nor afflict the successful, if it wishes to encourage economic growth.
This slippery moral slope is how government domination of the economy becomes toxic. Most members of society can agree that some things have an intrinsic moral value which should be supported, even if there is no monetary value. We do not wish to see other citizens starving to death or have to organize an impromptu bucket brigade every time there is a fire. A good government skims the minimum possible wealth off the economy to pay for sustaining an environment in which the society/economy can function. It provides arbitration between citizens and business to assure an orderly economy and it provides organized violence to shield the society/economy from looters, both foreign and domestic (invading armies or domestic thieves, respectively). These efforts, a court system, and armed protection in the form of armies and police, cannot generate any wealth or monetary value to the point that that they can be supported by individual customers. Societies fund government to pay their way. It provides an environment in which business can thrive. The difficulty lays in the fact that mere humans, politicians, are the ones assigning “value” and they are not disinterested observers. Yet, they are consuming real, objective resources in pursuit of their subjective “value”. When they begin putting public funds to support things they have decided have value, in their subjective view, projects that have no monetary value, where does the gravy train stop? What poetry contest, sculpture, or memorial is “unworthy”? This is why government spending must be limited to only those things which private action absolutely cannot provide. Even charity must be voluntary, not coerced through taxation.
We must admit the following. The government doesn’t produce wealth or add any value to the economy. The government is, at best, a benevolent parasite on its society. It lives off the organism draining some percentage of its vitality (but, hopefully, providing a service that outweighs the drain). If something has a value that humans are willing to pay for, then someone comes up with the means to provide it and customers pay for it. It is driven by the populace seeking self profit. Those things that require government support are, economically, losers. The greater the percentage of our economy that is paid for by taxes, the greater the percentage that is a net “loser”. Since it is supported directly by the productive parts of the economy, it is not only a “loser”, but, actually, exerts a weakening or crippling effect on the rest of the economy as a whole. Keynes was wrong; government spending doesn’t “prime the pump” or stimulate economic growth in hard times, in fact, it puts leeches on the already sick patient. It burdens and inhibits growth.
We see this failure repeatedly in the top down, government-dominated economies. The degree of failure has always been proportional to the degree of control exerted by the government. Western, socialist, welfare states were failing until Thatcher led privatization. The ultimately controlled economy, the Soviet Union, eventually utterly failed, collapsing and even disappearing as a state, to be replaced by “Russia”. Throughout the third world, the newly independent countries that went the “socialist” route economically collapsed.
The old Soviet Union’s economic difficulties are nearly the perfect case study for the third and final reason why government-centric economies always fail.
OSSIFICATION
Government bureaucracies, by their very nature, are not nimble enough to negotiate the rapidly-changing pace of both technology and human desires. Governments are composed of a few leaders who achieve position by either popular mandate or maneuvering within the ruling system. These leaders are the ones who create the grand design or general guiding direction for the government. However, the implementation of that plan or direction comes down to technocrats within the system. The implementation of the orders and the resulting feedback on the success or failure of that implementation flows back through the bureaucrats. In the old Soviet Union, if there was a public dissatisfaction with a lack of “blue jeans” to purchase, the bureaucracy had to realize that there was a desire and transmit that back up to the leadership. Once the leadership learned of this desire, they had to debate amongst themselves if there were sufficient resources to supply this desire and if the desire represented a legitimate use of resources, in their analysis. If they decided to attempt to satisfy this desire for “blue jeans”, they would have to create a committee or designate an individual to design the “blue jeans” in a fashion that was determined to be the most widely appealing to the largest part of the population. This design, once settled upon, could have the manufacture designated, distribution arranged, and eventually they would begin to become available to the public.
By that time the public would be wanting “khakis”.
This is why the Obama administration seems to be focusing on the economy of the early 20th century, rather than the world of today and the other reason why government initiatives fail. Governments apply economic lessons that have been studied, analyzed, and learned. By the time that has been done, technology, human desire, and initiative have moved the economy leagues beyond the last point “analyzed”. The old Soviet Union succeeded in providing their people with housing, jobs, clothes, transportation, and food. However, they provided a 1949, middle class lifestyle to the majority of their citizens by 1980.
CONCLUSION
While not often specifically enumerated, most honest economists realize that there are reasons that “top down” “government-directed” economies ultimately fail. This begs the question of why any well-meaning politician would still be clamoring for “government” to have a greater role over a greater percentage of their nations economy. The answer to that is distressing in either possible answer. Either they are simply woefully ignorant of the history of applied economics in the 20th century or, worse, they do not truly care for their fellow citizens’ economic success. Their greatest interest is in establishing their own control over the minutiae of every aspect of their citizens lives.
You will wear the pants I tell you to.
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Comment by Polydamas:
The great 19th century economist Frederic Bastiat wrote very persuasively about the readily seen and more hidden effects of economic decisions. For example, when store windows are broken (or a Hurricane Katrina destroys New Orleans), many people unfamiliar with classical economics mistakenly believe that this will be a great economic boon to contractors that fix the damage and, by extension, to the economy as a whole. They then erroneously conclude that a calamity can produce economic growth. The problem is that they only see the money that the store owner pays out to the contractor to fix the damage who then spends the money on goods and services down the line, and think this is great. What they do not see is that, because the store owner had to pay good money to have the previously-unbroken windows fixed, this same money was not available to grow the business. The store owner had to pay to get back the windows he already had and, therefore, did not have the money to buy more inventory to sell to customers, did not make a profit, could not reinvest it in the business, the business declined, and some painful sacrifices had to be made.
The same trade-off takes place when government hires a teacher. The teacher earns a salary and she pays her bills with that salary, but this is not all good. The money to hire that teacher had to come from somewhere, namely from taxes on individuals and businesses. They had to pay more in taxes on account of that teacher and that money was not spent on something else that these people needed in order to improve themselves economically or grow their businesses. The government’s decision to hire another teacher deprived taxpayers of their freedom to make their own informed economic choices and to vote with their dollars for the goods and services that they needed, with the result being economic decline due to government overriding by force the decisions of the marketplace.
Frederic Bastiat’s economic wisdom can be found in his famous essay “That Which is Seen, and That Which is Not Seen” which is available at http://bastiat.org/en/twisatwins.html
The same trade-off takes place when government hires a teacher. The teacher earns a salary and she pays her bills with that salary, but this is not all good. The money to hire that teacher had to come from somewhere, namely from taxes on individuals and businesses. They had to pay more in taxes on account of that teacher and that money was not spent on something else that these people needed in order to improve themselves economically or grow their businesses. The government’s decision to hire another teacher deprived taxpayers of their freedom to make their own informed economic choices and to vote with their dollars for the goods and services that they needed, with the result being economic decline due to government overriding by force the decisions of the marketplace.