As the shadowy fingers of a double-dip recession tighten their embrace on the United States, Washington is attempting to turn on the lights by trumpeting its usual litany of Keynesian remedies. You can hardly read your favorite newspaper without seeing some new governmental proposal. Akin to a Neanderthal discovering fire, Congress is clumsily thumbing through a myriad of proposals to light up the economy—whether it be increasing unemployment benefits; providing more governmental projects, homebuyer credits, tax rebates or the policy used to scrap a hatchback for an SUV. We have been subjected to so many proposals, so many policies, that we need a forklift to carry all the federal rules and regulations. However, government intervention, while presumably well intended, has not improved the economic situation during our current recession and, in fact, has had little to no beneficial effect on the economic climate in the past.
It is regularly argued by academia that the government must step in as the last consumer when all other buyers have left the market. They argued that Roosevelt and the New Deal Democrats saved America by using the federal government as the engine to jump-start the economy. Assuming that was the case, (one could also argue that monetary supply was extremely lax during the Roosevelt years compared to Hoover’s) one cannot use the 40s as the touchstone for economic policy without considering what our forefathers “bought.” Back then, the federal government was more responsible in their expenditures—they spent on investments that would provide a return on capital through additional productivity. Money was spent on highways, industry, steel—the lifeblood of American ingenuity was pumped into an anemic economy and our nation entered a new era of prosperity.
Unfortunately, the light of an enlightened government appears to be setting, and a new dawn of misguided policies has emerged. We look at the new horizon and stand agog. The following factors will lead to the failure of current governmental policies.
- Taxes. Nearly all government spending is financed by taxes, and high tax rates reduce incentives to work, save and invest resulting in a less motivated workforce, as well as less business investment in new capital and technology. Few government expenditures raise productivity enough to offset the productivity lost due to taxes. Additionally, the prospect of higher taxes has stunted business spending because budgets are unable to be planned accordingly.
- Incentives. Social spending often reduces incentives for productivity by subsidizing leisure and unemployment. Combined with taxes, it is clear that taxing Peter to subsidize Paul reduces both of their incentives to be productive, since productivity no longer determines one’s income.
- Market allocation. Every dollar spent by politicians means one dollar less to be allocated based on market forces within the more productive private sector. For example, rather than allowing the market to allocate investments, politicians seize that money and earmark it for favored organizations with little regard for improvements to economic efficiency.
- Inefficiencies. Government provision of housing, education and postal operations is often much less efficient than the private sector. The government also distorts existing health care and education markets by promoting third-party payers, resulting in over-consumption and insensitivity to prices and outcomes. Inefficiency can also be seen when politicians earmark highway money for wasteful projects rather than expanding highway capacity where it is most needed.
- Strengthening other nations and crowding out investment. Wearing a perceived aegis of enlightenment, the current government is spending at an unsustainable rate. If this continues, we may sell the future of the next generation to foreign serfdom. Of even more immediate concern is the indisputable effect it will have on long-term interest rates. As the deficit increases, rates will rise because lenders will require more in interest due to risk of default. As market rates increase, entrepreneurs, the backbone of this economy, will be unable to tap into the credit market to fund their investments—expenditures that would have increased productivity. Hence, a vicious cycle is created. Our economy becomes weaker, while others abroad become stronger as they reap more from their coupon payments
We posit that the government can assist in navigating the economy through the watery shoals of Scylla and Charybdis by taking a backseat to the entrepreneur! The government should cease its inane addiction to spending policies and allow business owners and consumers to spend their money however they desire. It is far more fiscally sound for a business owner to purchase a computer in order to improve his or her ability to compete in the marketplace, than for the government to purchase it on behalf of a nameless bureaucrat.
If the government truly wants to take an active and positive approach in helping the governed, we suggest that it stop imposing a payroll tax on the first $20,000 of W-2 wages. This will provide significant virtues. For example, those most in need of assistance will have additional funds to pay their bills in these uncertain times. Since a corporation’s portion of payroll taxes will be reduced by an amount of $1,530 for each employee, the corporation will be able to use the funds to pay for capital investments and hire new workers. Companies will have a reduced administrative burden in smaller payroll withholdings.
We must not squander the legacy of our forefathers. We must not tax and spend to no avail. We must not donate our future to foreign governments. We must stand for liberty and the pursuit to make a decent living as we invest in America. Government policy must take a backseat to the entrepreneurial spirit that is the bedrock of our nation.