Obama still doesn’t get it – Government can’t create economic growth, only prevent it.
Can I make a small request? Before we go throwing more good money (American Jobs Act) after bad (American Recovery and Reinvestment Act of 2009) can we review some basic economics?
Let’s start with what economic growth is and what it isn’t. Contrary to what the evening news would have you believe, GDP is not a measure of economic growth, as GDP is positively impacted by reckless government deficit spending. Politicians like this fact because all they have to do to claim success – in the short term – is to waste more money than the last guy. To date, no president has been more successful in this regard than Obama.
So what is economic growth really? Very simply, economic growth occurs when the overall productivity of society increases. In other words, the average individual’s labor produces more goods and services than it did previously. As more “stuff” is produced by the same amount of people, that “stuff” becomes more affordable. On average, the standard of living increases. That it positive economic growth.
The key to maximizing this productive output is to correctly align capital with the needs of the market. The good news is that this is exactly what the free market does all by itself. Profit is the critical signal that directs resources to where they are needed the most. Excessive profits indicate that demand has greatly outstripped supply. And it is these excessive profits that attract competing capital to provide additional supply and lower prices. Hence the old axiom, high prices are the best cure for high prices.
Another wonderful attribute of a free market is that those who are most skilled at increasing productivity are rewarded with the most new capital to deploy. Those who prove to be incompetent in such endeavors are swiftly punished through insolvency, as no new capital comes their way.
I consider the electronics and computer industries to be the closest thing to a free market that exists today. At least in part because government bureaucrats are unable to keep up with its complexity and rate of change.
Take a look at those who run Apple Computer. They have been extremely successful at aligning their capital investments to produce what the market wants. As a result, the market rewards their competence with additional capital to deploy. Each year they use these new resources to provide better products at lower prices. Each year they create sustainable, long term jobs. The economy and society benefit from their success.
Now let’s compare this to how the government creates jobs: Step 1) borrow money. Step 2) create make work projects. Step 3) pay people to complete said projects.
There’s really only one thing that you need to understand to shatter the whole myth of government induced economic prosperity: Governments have no wealth of their own. Any money the government has, must either be collected through taxes, borrowed, or printed. But regardless of the exact mechanism, all wealth possessed by the government is capital that is deprived from the private sector.
Had this capital been allowed to remain in private hands, it would have eventually made it to those who have the demonstrated skill at creating real economic growth (increased productivity). This leads us to a fundamental understanding; the mere act of creating jobs has no fundamental link to economic growth.
It is a trivial matter for government to provide 100% employment. This is exactly what the communist Soviet Union did. However, it suffered from virtually no real economic growth. Their standard of living was horrific compared to capitalistic countries.
And so we find ourselves on the path to a reduced standard of living, as each year, more and more private capital is miss-allocated to feed such political boondoggles as the American Jobs Act. If Obama had only a modicum of economic knowledge, he would understand that the greatest thing the government could do for the economy would be to slash its spending and simply get out of the way.
Thank you for your simple, straight forward explanation of the free market system. Now, how do we get this message to the “unwashed masses” ? Unfortunately, we need another Reagan.
Record excess bank reserves of $1.2 Trillion – which equates to 12 Trillion in lending on the sidelines have resulted in a contraction in credit and capital.
Probably because of a combination of the high risk potential insolvency with consumer and business debt being high with a low GDP growth and low interest rates discouraging the loan market and having them wait it out until rates rise.
So inflation vs deflation rests on a number and a lending policy. Economic growth is based on production that offers some value wherever it originates but it does need capital to kickstart from the current stagnation.
I think it’s wonderful when a company provides commentary that gives an insight into their politics. That way I can use the free market never to do business with them.