With the current debate over government spending and government control, I thought it would be useful to revisit a few basic economic concepts. The first one if how wealth is created. Wealth is created by saving more of your income than you spend. Now, in the short term, you can spend more than you make, like when you are spending money to open a new store. But once the store is open, then you must take in more money than you spend, to create wealth. Many people in our country have created wealth—not just the wealthy. If you look at your personal balance sheet, do you have more assets than you did twenty years ago? —if yes, then you have created wealth. Most people who live in our country can create wealth for themselves. The accumulation of wealth is of benefit to each of us because it gives us more choices for pursuing personal freedom and liberty. It is also good for the country, because it provides the foundation upon which collective enterprise can occur-including the collective enterprise we call the government.
Many people confuse creating wealth with creating value. Value is created when you put together labor and materials and sell the resulting combination for more than the cost of the individual labor and materials by themselves. You create value because you provide something that the buyer does not have the time or the knowledge to make the product themselves. But to create value the selling price must be more than the cost of the individual components. Creating value is important because if you want to create wealth (spending less than you make) then providing value allows you a method of increasing your inflow, over your outflow. Creating value is also important because value is what drives commerce, which drives our country. We buy goods and services because we see the value in what those goods and services provide us, otherwise we would not buy them. Creating value creates demand which allows you to sell something for more than it cost to acquire, and thus allowing income to exceed expenses, thus creating wealth.
These principals apply whether you are Bill Gates, investing billions in new software application, or a boy with a paper route, who puts 10% of everything he earns into a piggy bank. Prosperity for all is a direct result of the creation of value and the accumulation of wealth.
So, let’s put this in perspective of the government. The government neither provides for the accumulation of wealth, nor creates value. We know the government does not provide for the creation of wealth because it taxes wealth, so it takes wealth away. Further, the government engages in several deceptive practices to fool people into thinking that the government is not taking wealth away from the average taxpayers. Campaign slogans talk of taxing the wealthy and taxing the corporations. But the government engages in a host of taxes, fees, assessments, licenses, and other supposed “revenue” sources that affect people of all income levels (and in many cases affect people with less wealth more than those of greater wealth). The more money the government takes from its citizens, the more it reduces the wealth of its citizens.
We also know the government does not create value. In fact, it wastes value creating resources. A perfect example is labor. A person in the employ of a private enterprise is going to create value as the company sells its products for more than it cost to make. But an employee of the government is engaged in no such value creation activities. So, the more people who depend upon the government for their income, the less who will be engaged in value creating activities. The result, the bigger the government grows, the more value creating resources it removes from the economy. There is probably a critical point at which a government could get so large, that its pull of value creating resources from the economy (along with its pull of wealth from the citizens) has such a significant impact that the economy cannot grow, and thus it shuts down the ability of the economy, and individuals in that economy, to create wealth.
What I do find interesting is that our economic growth is no longer fueled by the natural creation of value and the creation of wealth through industrious activity of our citizens. Economic growth for the past twenty some odd years has been achieved by the government(s) borrowing money (or perhaps we should we say creating money) and then feeding that money into the economic system, which in turn increases demand, allowing for the creation of wealth through rising prices (the laws of supply and demand).
There are questions we should be asking. The first is we should ask if this new economic model is sustainable? Can we borrow our way to wealth creation?
The second question we would ask is has the government reached a size where it has pulled, and is pulling, so much wealth and value creating resources from the economy that the economy can no longer grow through the efforts of individuals and business enterprises creating value and accumulating wealth?
I am not a trained economist. But sometimes things that are out of the realm of our expertise still seem obvious. I am not a ship’s captain, but I still know that when navigating a channel, I am best to stay near the center of the channel, as opposed to getting too close to the shore. When I look at these questions, I think the answers are obvious. We cannot manage long term economic growth by borrowing and/or creating money, and we some time ago reached the point where the wealth and productive resources pulled from the economy by our government are having a very detrimental effect of the accumulation of wealth and the creation of value by our citizens.
Most people know that for years those people in China with money took some of the money and purchased houses in California, British Columbia, Australia, and other places around the globe. Why? Were they looking for vacation homes? No. They moved their money out of China and into real estate in other countries as a hedge because many of them think the day will come when China’s economy, propped up by government control and manipulation, will collapse. And when it does, those people who “stashed” their resources in another country will be better off than those who did not.
This begs the question: “What should we Americans do with our capital to hedge against the possible collapse of the US economy brought on by government control and manipulation?” I’m thinking a coffee plantation in Costa Rica or a vineyard somewhere in Italy. No matter how bad it gets, some of us will still want to start the day with a cup of Joe and end the day with a glass of cab.