My goal here is not to praise or critique any of the great (and not so great) economic thinkers. I do plenty of that in my book, Greed, Power and Politics, the Dismal History of Economics and the Forgotten Path to Prosperity. This article is simply to outline the basics of my economic philosophy, including the proper role of government is society.
The first and most important recipe in my philosophical cookbook is mutually beneficial free trade. This is the goose that lays the golden eggs and without it all economies wither and die. Therefore, the ingredients include: vigorous foreign trade, universally fair-trade policies, peace, respect for private property, fair and predictable taxes, equal treatment under the law, entrepreneurship, and public investments in infrastructure, healthcare and education.
From an economic perspective, it makes no difference whether commercial enterprises are owned publicly or privately, or even whether publicly owned enterprises compete with private enterprises. What matters is that there is free and fair competition. In other words, which entities can provide consumers with the highest quality products and services at the lowest costs, while also providing the highest levels of customer service. Finally, which entities have best earned the trust of consumers.
In a free society, governments exist for only one purpose; to provide an array of services to its citizens. These services may be somewhat abstract, like safety and security — examples could include protection from invasion by foreign enemies, or from bad actors that threaten our possessions or bodies — to more tangible services like mail delivery or disaster relief. This does not mean that I am personally going to receive a dollar for dollar benefit from all government expenditures, but that society receives more value from those expenditures than their costs. Therefore, if you follow this reasoning, then there is no limit to the size and/or scope of government, only that it continues to provide more value to its citizen than it costs its citizens in taxation or debt. This concept can be compared to a product or service in the private sector where the perceived benefits of every purchase that a consumer makes must be greater than the cost to that consumer; otherwise the consumer will simply keep her money or spend it elsewhere. There are thousands of examples in the private sector where a company starts with an idea discussed at the kitchen table to a multi billion-dollar conglomerate. The only limit to a company’s size and budget is its ability to provide value added goods and services to a growing customer base. The difference, of course, is that governments have the power of law and can force consumers (through taxation) to pay for any frivolous expense.
Basic financial principles do apply equally to our government as they do in the private sector. Too many public officials treat the federal government of the United States as a special case where normal rules of business, finance and management do not apply. There are too many examples to cover them all, so I’ll just touch on a few: In a downturn, businesses cut costs. The federal government increases spending; because revenues go down when we are in a recession and as loyal followers of John Maynard Keynes, they increase federal spending to “stimulate the economy.” If an idea, product, service or practice fails, businesses cut their losses, change course and move on. The federal government refuses to acknowledge its mistakes and continues to throw money at its failures. Private insurance companies understand risk and design disability products that, based on actuarial tables, will continue in perpetuity. The federal government designed a disability program that crushes the federal budget and greatly contributes to our mounting debt. A business knows its customers and their needs and will work as productively as possible to provide the most value for the lowest cost. These concepts are rarely considered by federal bureaucrats. Businesses’ operating expenses are limited to the confines of its revenue, including a reasonable provision for debt and its repayment. The federal government spends money with complete disregard to its income because it is able to supplements its revenue with a seemingly endless supply of debt and makes no provision for its reduction.
“Earmarks” are included in every spending bill, which are special provisions usually placed in popular legislation that directs federal money to be allocated to a specific project or provides specific exemptions from taxes or otherwise mandated fees. We often refer to these earmarks as “pork” or “pork barrel spending”. Let’s say that I am a huge political donor and decide to build a $100 million-dollar hotel in the center of downtown. Naturally I want to fill it with paying guests, so I call my congressman and strongly suggest that our town needs federal economic assistance — in the form of a new convention center. Let’s assume that my hypothetical congressman is a member of the powerful House Committee on Appropriations, he simply adds my request to the next piece of legislation and voila, I have a full hotel and the city gets a taxpayer financed, economic shot in the arm. My political donations weren’t really donations at all. Instead they turned out to be a very sound business investment. My point should be obvious: Special interests aren’t making donations; they are investing in favored legislation for the benefit of themselves and their clients. In any given “Earmark” the money involved is insignificant to the federal budget, however, if you consider the thousands of earmarks in any major spending bill the cumulative effect is enormous. Also consider that this practice has been continuous for the past several decades. These government expenditures represent a zero-sum gain (or game) to society. In other words, some special interest group has gained in exact proportion to the taxpayers’ loss. There was no real benefit to our society at large.
There are many economists and politicians that believe that deficits don’t matter. Remember that deficits are cumulative and add to the federal debt which has recently surpassed $22 trillion. The last president that took the federal debt seriously was Calvin Coolidge back in the 1920’s. This means that money spent by FDR for the New Deal and World War II are still buried in today’s total debt. In addition, the unfunded liabilities of the United States are over $120 trillion. Until, as a nation, we can get healthcare costs under control, the current trajectory will be fiscally unsustainable, Frighteningly, both the federal debt and unfunded liabilities have been sky-rocketing for the past decade. There is a limit to how much money the federal government can afford to spend and how much debt our nation’s creditors can absorb. It is true that the United States can never become bankrupt and that our economy is incredibly large, diverse and strong, however, there are numerous examples of “fiat money” countries that have imploded as a result of excessive debt relative to the strength of their domestic economies. The future of the United States is potentially vulnerable to the same fate — except that there will not be enough credit available anywhere in the world to bail us out, resulting in an international catastrophe.