Monday, Feb 9, 2009
While Congress has passed an $800+ billion economic stimulus plan, almost everybody in America seems caught up in a common economic fallacy: The idea that Government can “create” jobs through debt spending.
Government spending of debt money does not result in any net creation of jobs at all. It only confiscates wealth from private citizens and forces them to pay for centrally-planned jobs that the real economy usually neither needs nor benefits from.
Consider three people living in an island, running their own tiny economy. Bob, Sarah and Charlie are all farmers who grow their own food, making an honest living by working 8 hours a day to create the food, clothing and shelter they need to survive.
One day, Charlie decides he wants to be the Governor of the island. He tells Bob and Sarah that as Governor, he’ll bring wealth and prosperity to them both. Initially, that sounds good, so Bob and Sarah agree to elect him Governor.
Then it turns out that the Governor is busy governing things on the island (i.e. deciding what everybody else should do), so he has no time to grow his own food. So he initiates a 50% tax on the productivity of Bob and Sarah, confiscating their food, clothing and resources in order to provide those items to himself without actually having to work for them. (This is a key function of government: To confiscate wealth from those who really work and redistribute it to those who pretend to work.)
Now, Bob and Sarah each have a choice: They can either work twice as much in order to pay their tax and still have enough to survive, or they can quit working altogether and hope to get aid from the government.
Sarah decides to work twice as much, so she starts working 16 hours a day, earning enough to pay the taxes to the Governor while still having some remaining food to feed herself and her family. Bob, on the other hand, decides he doesn’t want to work 16 hours a day and would rather do nothing and apply to the Governor for “public assistance.”
So now on this island of three people, where each of the three people used to work to feed themselves, only one person is working (Sarah), and the other two are living off the wealth that’s being confiscated from her efforts.
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One day Charlie, the Governor, says he has a solution! He says he will write a series of IOUs to Sarah in exchange for an extra portion of her food and other belongings. Using that currency borrowed from Sarah, he says he will “create a new job” for Bob and “end unemployment on the island.”
Sarah reluctantly agrees and turns over the fruits of her labor to the Governor, who injvents a job for Bob. “Bob,” he says, “We need to build a bridge across this island!” And with the wave of his hand, he puts Bob to work creating a bridge (that nobody needs) while getting paid by wealth that has been confiscated from the only person on the island still working (Sarah).
So now we have ONE person actually doing productive work, a second person living off the confiscated wealth of that person (the Governor), and a third person working a useless job that’s now paid for by the first person as well. This means we have ONE person supporting THREE. And while the island is at “full employment,” two out of three people are actually doing jobs that don’t materially contribute to the wealth and abundance of island’s residents.
And the best part? Guess who gets to work even more to pay back the IOUs that the Governor traded with Sarah? Well Sarah, of course, because those IOUs are public debt paid back by taxpayers.
The problem on this little island is NOT that insufficient money is being spent on an economic stimulus program; the problem is that the island suffers from too many bureaucrats and too much debt spending. The solution? Fire the Governor and the government worker, shrink the size of government and get everybody back to working their own gardens, growing their own food and supporting their own families. Productivity on the island would triple, and people would have to get back to doing honest, productive work instead of living like parasites off the efforts of taxpayers.
Government jobs are created with confiscated wealth
Although greatly simplified, this little scenario demonstrates the ridiculousness of anyone who believes government can “create” jobs. Government creates no net increase in jobs through debt spending. It only confiscates wealth from those who are willing to work and justifies its own wealth confiscation efforts by pretending to offer solutions to the very people it is stealing from.
In some cases, this is justifiably important: You need schoolteachers, bridges, and roads to run a successful society. Cops and firemen, court judges, and international delegates are necessary, too. But remember this: 85% of government money is spent on just three things: War, Disease and Debt. That’s where most of your tax dollars actually go (see corrected figures below). Only about 15% of the money you send Uncle Sam goes to pay for anything useful. Most of it is just wasted away by a government that believes its debt problem can be solved by more debt spending.
Total U.S. Federal Budget for 2008: $2.9 trillion
If you look at where U.S. government spending actually goes, more than 85% is spent on these three things:
1) WAR: Department of Defense ($481.4 billion) + War on Terror ($145.2 billion) + Dept. of Veterans Affairs ($39.4 billion) = $666 billion
2) DISEASE: Medicare ($386 billion) + Medicaid ($209 billion) = $595 billion
3) DEBT: Debt to the people: Social Security ($608 billion), Welfare ($324 billion) and Interest on National Debt ($261 billion) = $1,193 billion
Combined spending on War, Disease and Debt: $2,454 billion ($2.5 trillion), which is 85% of the total expenditures by the federal government.
Now, Obama wants to write out $800+ billion in new IOUs and use that money to “stimulate” the economy. This is equivalent to confiscating about $5,000 from each and every taxpayer in America today (depending on the number of taxpayers you use for the calculation). It’s the equivalent of saying to Sarah that she needs to turn over all her garden food for the next two months in order to “stimulate” the island economy. And how will that economy be stimulated? By giving that food to people who believe they are entitled to more abundance than Sarah without actually having to work for it. Before long, Bob will be riding in a private limo and flying in a private jet, complaining to the Governor that his industry of bridge building provides 1/3 of the jobs of the entire economy, and he needs more money or the island economy will collapse!
I’m not sure America can survive much more of this debt-spending “stimulus.” The U.S. economy has, in large part, become illusory, propped up by yet more bailout money being spent to create the illusion of meaningful jobs. The idea of saving money has been abandoned in favor of endless spending at both the consumer level and the national level. If this philosophy does not change, the financial outcome will be disastrous.
America needs more savings, not more spending. It needs to get the government off people’s backs, not create even more government to centrally plan yet more “stimulus” programs paid for by confiscating wealth from the fast-shrinking pool of people still working private-sector jobs in America today.
One thing’s for sure: The people in Washington D.C. need to read Economics In One Lesson by Henry Hazlitt: http://www.amazon.com/Economics-One…
This article was posted: Monday, February 9, 2009 at 5:51 am