Posted by
Curt Ferguson on Saturday, January 10, 2009 11:30:00 AM
As government gears up for massive spending under the Obama administration, brace yourself for an overall decline in standards of living. Not that this ever mattered to powerful Democrats...so long as their own standard of living is unaffected.
The private sector as a whole always...always...produces goods and services more efficiently than does the public sector. As a result, standards of living overall then rise. The public sector produces fewer goods and services using the same resources, and the standards of living must decline. At a given time, the degree of private activity versus public activitiy indicates which way standards of living will be going. As overall expenditures are currently shifting toward public (government) and away from private...standards of living are headed down.
For readers who don't understand what that means, let me break it down further. When individuals risk their own money to start a business they are careful to create an efficient, profitable business. Otherwise they lose their investment; they lose their own money. Of course, many private businesses don't last, and the investments are lost anyway. But the natural tendency of someone investing his or her own money in an enterprise is to be very cautious, very careful about it. After all, if they mess up, they are in terrible shape! They lost whatever they invested, and as a result they are poorer, perhaps destitute. No one to blame but themselves, and nobody to replace it for them.
On the other hand, when "business" activities (build a bridge, improve a building, educate your kids, etc.) is undertaken with money allocated by politicians, the people who get the money to manage have less incentive to use it efficiently. From my days on the school board I recall being told, "we must spend everything the state allocated to us each year, otherwise the state won't give us as much next year!" Or the public teachers' union rep who said, "we never give up any benefits we have got in past contracts, we always start from the last contract and demand more." The incentives built into a public-financed system encourage the people in charge of the money (whether the local superintendent of schools, or the government worker, or the head of the government agency) to actually assure it is spent and gone, rather than assure that it is used to create more money or [gasp!] a "profit." If a school uses up all of its allocated funding at the end of the year, it is rewarded with a larger allocation the next year. If a bridge building project has cost over-runs, the government allocates more money to finish the job (after all, you can't leave a bridge unfinished!). So the local person in charge of the expenditures has more incentive to spend lavishly, hire his brother or son or sister or wife or good friend and pay even better than going rates, rather than to make every dollar go as far as possible.
As a result, private investment generally makes more (product, goods, service...output for the enjoyment of others) with less (money invested). Public "investment" of the kind Washington is now spending produces less output from more dollars invested. As a result, as Adam Smith might say, the overall "wealth of the nation" declines.
To pull out of this recession there are alternatives to the massive government spending, "dramatic action as soon as possible" as the Anointed One said a few days ago. Too much government intrusion has been the problem. Reducing government intrusion is the solution. Roll back regulation and excessive taxation to free up the entrepreneurial spirit. More goods and services to be enjoyed by all at cheaper prices will be the result. Standards of living will rise again.
Alas, that is not where we are headed. Our country seems to be putting it's faith in big government, a big government that will take more of the dollars available and invest them in less productive ways resulting in declining standards of living; fewer actual goods and services to enjoy, and less money to enjoy them with.