Remedial Economics 001

Gather round, boys and girls, and Uncle Sid will share with you some truths that you probably never heard in school…although you should have. If your parents want to read along, that’s fine too – Lord knows we wouldn’t be in the mess we’re in right now if they all understood what I’m about to say.

Listen very carefully: The government does not, indeed it cannot, create wealth. (Which is not to say that some individuals haven’t become quite wealthy from dealing with the government.) All the government can do is to redistribute wealth. Wealth is created by private individuals operating within a free market system. In the simplest possible terms, wealth is created when somebody sells something at a profit.

Wealth is created by people who get up every morning and work 60, 70, and 80-hour weeks busting their backsides to build a small business. It’s created by publicly held corporations that operate at a profit so they can provide their shareholders with a return on their investment. And it’s created by ordinary people who save or invest their money in everything from savings accounts to 401k retirement plans, which then gets loaned to other people and used to build companies and create jobs.

In fact – and this is something that most labor unions just don’t get – the only reason a corporation exists is to make money for its shareholders. Boeing exists to make money for its shareholders…it so happens that one of the ways it does this is by building airplanes. Microsoft exists to make money for its shareholders…it happens to do that by making software. And General Motors doesn’t exist to make cars, it exists to make money for its shareholders…which it’s trying, and failing, to do by making cars.

There are only three ways that the government can get the money it spends:

First, it can take it from you. This is called taxation. Even tariffs (another word for taxes) on imports and exports - which was the primary way the federal government was funded before the creation of the income tax - end up being reflected in what you pay for the goods, so it is ultimately taken from you. We’re expected to jump for joy when the government gives us a tax rebate – but think for a moment about how wasteful that is, when you take into account the cost of collecting the money from you in the first place, keeping track of it, and then writing a check back to you, compared to just letting you keep more of your money in the first place. And if you’re giving a “tax cut” or a “tax rebate” to someone who isn’t paying any taxes, then you are taking money away from someone who has earned it, and giving it to someone who has not earned it. That’s income redistribution, no matter how much President Obama tries to pretend that it isn’t.

Second, it can borrow the money. We have, and are, borrowing billions of dollars from other countries, including China. Eventually that money will have to be paid back, with interest.

Third, it can simply print more money. But that obviously increases the total amount of money that’s in circulation. And if the amount of money in circulation grows faster than the growth of goods and services that are being bought and sold, prices will go up. That’s called inflation. And if inflation gets bad enough, the only way to bring it under control is to crank down the money supply and increase interest rates, which generally causes a painful recession. Just ask an older relative who lived through the Carter administration how much fun that was.

The government is getting ready to spend $787 billion that it doesn’t have. And we’re being told that’s just the beginning of what we’re going to need to do to get out of our current recession. Where do you suppose the money is going to come from? Well, boys and girls, one way or another, it’s going to come from you and your kids. Sorry about that. But then most of the people in government who are responsible for this will be long gone by the time that bill comes due, so they don’t really care. Remember that when you get old enough to vote.

Thanks for listening.