Class, I have a bit of somewhat bad news for you. Our next lesson on why you, as politicians, spend rather than invest has been pushed back. After Lesson 4 on why you don’t create jobs and need to get over FDR I see that there still is a lot of confusion as to how jobs, and more specifically, wealth, is created. Between the comments posted on that particular lesson and some offline back and forth with some of your kindred souls on Facebook I realize that there is still a knowledge gap as to how actual wealth is created. This series of lessons is cumulative in nature, so if you miss a topic you’re going to have a hard time understanding follow up chapters. Any good teacher recognizes when his class needs to reinforce the basics before progressing with more advanced lessons. Unfortunately for you I’m not one of those good teachers but we’re going to step back a little bit anyway.
Before we continue, please take a few minutes to review this video by Declaration Entertainment’s Bill Whittle that explains how wealth is created. It complements nicely the example that I am about to give. Now let’s look at how government itself is defined:
Here is how government is defined by Wikipedia: “Government refers to the legislators , administrators , and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized. Government is the means by which state policy is enforced, as well as the mechanism for determining the policy of the state.” Basically, government is an institution that is created by a collective of people to run things, whether it be a military, a fire department, building roads, maintaining sewer lines, etc.
Did you notice what was not in there? Wealth creation – by its very definition government is an entity designed to determine and enforce state policy. To give you an abstract picture think of society as a business. The private sector is the equivalent of a sales force and the production staff (whether building cars or billing hours for services rendered) – the people who bring in the business that is needed to keep it alive. Other departments also make up the company, such as advertising, recruiting, payroll, training, accounting, legal counsel, etc. Because they do not bring in direct revenue they are referred to as “overhead expenses”.
Here is the first disconnect that seems to come from the left. Even though the overhead expenses do not directly contribute to the organization’s health, it does not make them any less important. If every employee in a corporation were responsible for recruiting cohorts, defending against lawsuits and calculating how much of each product sold needs to go into their paycheck each week they would be extremely inefficient and produce far less. Likewise, if every person had to maintain their own highway, personally deliver each letter and carry weaponry to fend off potential attacks we would all be far less productive and enjoy far lower standards of living.
This is where that disconnect comes into play. A favorite straw man of the left is to claim that Tea Partiers want to abolish taxes and/or government. This could not be farther from the truth. What is being questioned is how wisely our money is being managed by our elected officials. This is where the question over the wisdom of trillion dollar deficits comes into play. To paraphrase one of your most admired orators, “It’s not racism; it’s math.”
Going back to our business example, it is critical to understand that however important all of the overhead functions are to a business, they can not by themselves bring a slumping business back to life. A company can try to uptrain its staff, install solar panels to lower its energy costs, or go out and hire workers to help implement new HR policy, but at the end of the day these people do not bring revenue into the organization. Spending more money in these areas puts more money from the business’ coffers into people’s hands, but this does not mean that they will use it to go out and buy the company’s product. Transferring wealth from one group to another is nothing more than that – a transfer of wealth and not its creation. The only way to revive a failing business is not to issue debt to pay for more overhead, but to to find ways for sales and production to drum up more business. This is referred to in your circles as “economic growth”, and “broadening the tax base”.
Another element that blocks leftists from understanding wealth creation is seeing various accomplishments by the government – the Marshal Plan, DARPA’s communication project that would evolve into the Internet, the US highway system, etc. The biggest part of this favorite straw man of the left is the assumption that conservatives say that the government does not produce anything of value. Aside from the most hard core libertarians, this is also untrue. What is being argued is not that the government does not produce anything of value, but that what the government produces can only be created thanks to the wealth that is generated by its working class.
To try another example let’s look at a primitive hunter-gatherer society (and please don’t get caught up on my gross historical inaccuracy). This society starts out with Chaka, a lone caveman. He has responsibility for many things in his life – being able to find the roots and berries he needs for part of his diet and the ability to kill certain animals for the rest of his meals. He also has to be able to work the pelts of animals he kills in a manner that he can wear them to keep him warm. Chaka needs to be handy with his club to fight off larger animals or the ever present threat of other cavemen who want to hurt him and take his belongings.
Chaka eventually meets other cavemen, they form a tribe, and as they continue in their daily lives they begin to notice that some of them are better at certain tasks than others. Chaka comes to realize that he is better at hunting animals than the rest of his fellow cavemen. Others have skills they do better than Chaka, such as preparing animal skins for clothing, cooking the gathered food, tending to sick or wounded cavemen, or building huts. Each of them finds a role where they can produce something of value for themselves, and by trading with other cavemen each member of this tribe creates some degree of wealth.
The tribe also realizes that there are things that they need collectively but are impractical to trade for individually, so they form a government. They all give a portion of what they produce to a chieftain to organize and administer some programs that benefit the entire village. From the tribe’s donations one caveman is given a massive machete to hack a path from the forest to outlaying villages and build the Intervillage Pathway System. A few others are given the largest clubs to form the “Tyrannosaurus Team Six” and patrol outside the village to protect the village from external threats. And of course, these pathway builders and protectors need food and shelter, so for their service for the common good they are given food and have shelters built for them by the other villagers who benefit from their work.
Do the villagers all benefit from these tribal programs? Absolutely. But note how these programs are funded. They are only able to exist because the rest of the members of the tribe are able to generate enough of their own wealth that they are able to use a portion of it to buy these pathway systems or common defense. The tribal chieftain can’t just “give” any of the villagers a job without the wealth of others. Yes, the chieftain could borrow against future wealth to stimulate an out of work cavemen with a make work project building solar powered camp fires funded by IOU’s against the next harvest, but make work stimulus of no real value paid for against future standards of living has never worked and never will work because it does not work..
These are our two examples to illustrate how the government, by its very definition, can never create wealth. To recap the straw man arguments of the left:
Nobody on the right is suggesting that we abolish the government or taxes.
Nobody on the right is suggesting that government does not produce anything of value.
What is being said is that the government can not create wealth. For this same reason the government does not create jobs without destroying others. Now you are ready to go back and re-read Chapter Four.
To paraphrase an ad campaign that should have gone away a long time ago, “it’s so simple even a caveman can get it.”
Previous Lessons:
Lesson One: It’s Not Your Money
Lesson Two: Intro to Microeconomics, or Why Prices Matter
Lesson Three: Intro to Macroeconomics. or So that’s Where Government Fits In!
Lesson Four: You Don’t Create Jobs – It’s Time to Get Over FDR!
Lesson Five: Businesses are Greedy – That’s Not Necessarily a Bad Thing!
Lesson Six: You are Greedy – That is a Bad Thing!
Cross posted at Brother Bob’s Blog
