FUNDAMENTAL TRUTH #54: “Every dollar the government spends is a dollar that the consumer can’t spend.” -Old Pithy

Posted by PITHOCRATES - February 22nd, 2011

An Increase in Economic Activity Creates Jobs

Economic activity in a free market is win-win.  A buyer and seller come together.  They each have something the other wants.  One has a product or service.  The other has money.  Each values more what the other has.  So they trade.  And each feels they are better off after the trade.

Millions of such trades make up the economy as a whole.  And this goes on all by itself.  No one manages it.  No one steps into each trade to make sure it’s fair.  There’s no need.  If it’s not a fair trade one of the parties simply won’t trade.  They’ll go elsewhere to find a better deal.

As more people come together to make trades economic activity increases.  This activity creates more jobs (to meet growing demand).  Giving people more money.  So they can go out and make more trades.  Further increasing economic activity.

High Taxes and Government Spending Fell the Roman Empire

Many things made the Roman Empire a great empire.  Among these was the aqueduct.  And the Roman legions.  Fresh water allowed cities to grow.  And the army protected the cities from its enemies in other civilizations.   And the raiding barbarians beyond civilization.  But water and the army were costly, though.  It took a lot of money.  A lot of which came from the spoils of war.  And when the empire was expanding and there were always new lands to conquer there were always spoils to send back to Rome. 

But eventually the Romans saw their borders fixed.  And there was peace.  The Pax Romana (Roman Peace).  The problem with peace, though, is that you’re not waging war.  And when you’re not waging war you’re not sending home any spoils of war.  But the empire still had bills to pay.  Aqueducts to build.  And soldiers to pay.  So the Romans had to turn to other funding sources.  The citizens.  Taxes replaced spoils.

And the taxing and spending began.  The state grew.  The army grew.  And the government grew.  All required more and more taxes.  Then they debased the coinage (i.e., inflated the money supply by using less precious metal in each coin so they could make more coins out of the same amount of precious metal).  Silver coins contained more and more lead.  And were worth less and less.  Eventually Rome wouldn’t accept tax payments in silver coin.  You had to pay with gold.  Or taxes in kind (a wheat farmer gave a portion of his wheat to satisfy his tax obligation).  This got so bad that farmers quit being farmers because they couldn’t make any money with so much of their crops going to Rome to pay their taxes.  Then Rome passed laws preventing farmers from quitting farming.  The Roman citizen became an unhappy citizen.  Few wanted to serve in the Roman legions.  So Rome had to hire soldiers.  Which cost more money.  And on and on it went until tax and spend became tax and spent.  The empire spent itself into collapse.

The Key to Economic Activity is Private Sector Jobs

Every time taxes went up the Roman citizen had to pay more of his silver coins in taxes which left him with less to spend on his family.  When Rome debased their silver coins the Roman citizen’s money was worth less and bought less.  When more of a farmer’s crops went to Rome to satisfy their tax obligation they had less to sell at market.  Every time the government spent more the private sector spent less.  Because Rome transferred more of the private sector wealth to the public sector.

When the government takes more money out of the private sector, the private sector has less money to spend.  That means people are spending less when they go to the store.  Which means the store is selling less.  And when a store sells less they buy less.  And when they buy less manufacturers produce less.  So manufacturers cut back on production.  Lay people off.  Which means these people have less money to spend in stores.  So sales at stores decline further.  So stores buy less.  And manufacturers produce less.  Cut back on production.  Lay off people.  Who have less to spend.  And round and round it goes until the economy crashes into a recession.

The key to economic activity, then, is jobs.  We need jobs to get the money we need to make trades with other people.  If we don’t have a job we have no money.  And can’t trade for anything.  So we need jobs.  And who creates jobs?  Businesses.  And how do they do that?  By selling something.  The more they sell the more jobs they create.  The less they sell the fewer jobs they create.  And what helps them sell more?  Lower taxes.  What prevents them from selling more?  Higher taxes.  For the more money in the private sector the more money the private sector can spend.  And the more people can trade with each other.  Which increases economic activity.  Which creates more jobs.  Giving more people money to trade with other people.  And round and round it goes.  Until we all live happily ever after. 

An Economy Works Best when Government Intervenes Least

John Maynard Keynes was an economist that said that government could stimulate the economy by spending money during a recession.  Governments love this man.  Because it’s like a license to spend.  Never mind that it never worked.

Here’s why.  The government doesn’t earn any money.  They have to take it from someone else before they can spend it.  That’s like me giving you $20 out of my wallet so you can stimulate the economy.  And how much will you stimulate the economy by spending my $20?  Will it be more than if I spent that $20 myself?  No.  Because, in the end, someone is spending only $20.  Either you.  Or me.  The net spending doesn’t change.  Only who’s spending it.

This is the fundamental flaw in Keynesian economics.  Tax money comes from taxpayers.  Who work.  Stimulus spending only transfers the money to someone else to spend.  Leaving the taxpayer with less to spend.  Either now through higher taxes.  Or later through higher taxes to pay for past deficit spending.  Which is a very common feature of Keynesian economics.  Deficit spending.  And huge debts created by all that deficit spending.

Contrary to Keynes, an economy works best when government intervenes least.  This keeps the money in the private sector where it belongs.  Where it does what it does best.  Create jobs.

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