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Pelerin goes on to say in further edited excerpts:
…An economic recovery…is close to impossible if not impossible…[because,] in short, the nation has become an out-of-control welfare state that is rapidly destroying the incentives to work or create jobs. Government policies appear designed toward this end. One doesn’t need a high IQ or an advanced degree in economics to understand the problems.
Economics is not a top-down science as Keynesians and politicians want you to believe. You can throw as many Fed dollars into the system or devise innumerable government stimulus programs. These are all top-down. Economics is a bottom-up process that starts with individual decisions and behavior. Individuals respond to available choices and incentives. They act in their own self-interest not in the manner in which some government planner wants them to act. Top-down programs do not affect the incentives of the individual decision-makers.
- We raise the costs on those who work (higher taxes) and the businessmen who provide the jobs. One of the basic laws of human nature is that when you penalize something or make it less pleasant, people will want less of it. It is not a mystery why business is not hiring and the number of workers is declining. The return to both is declining as a result of government policies.
- We raise the rewards for not working. Another basic law of human behavior is that when you increase rewards for a particular kind of behavior, you will get more of it. It is not a mystery why more people are choosing the dole than ever before. Government has encouraged them to do by providing higher rewards.
- Add in the regime uncertainty associated with unstable or unpredictable laws and regulations and you have the perfect storm. There is no incentive to hire. Business hunkers down not knowing what is coming their way next. They understand they are targets of this Administration…
Why The Economy is Dying
- As government grows the private sector shrinks. As the private sector shrinks there are fewer goods and services produced (government produces no goods and few services). I believe it was Dick Armey who described this situation with the wagon analogy: there are more people riding in the wagon and fewer pulling the wagon. As the wagon becomes heavier, the remaining pullers must work harder to move it.
- The pullers must support the riders. Government does not support the riders or anyone else for that matter. Whatever government has it has taken from the pullers. Whatever it doles out it must get from taxes, borrowing or printing new money. Regardless of which means it uses, it is all coming from the pullers. They pay the borrowing back. They have less as a result of higher taxes. They are made poorer by the rising prices from the printing of money.
- As the burdens increase on the pullers and the benefits increase for the riders, more pullers decide to ride. The truly creative and talented can always make enough money to continue to work rather than ride. However, when their efforts can be expended in other countries that penalize them less, at some point they no longer pull the wagon. They leave the country to climes where they are treated better.
- Each increase in government spending means requires more money from the private sector. That means greater distortions in the incentive-disincentive calculus that produces fewer people pulling the wagon. Now fewer people must support more non-producers. Every time someone gets in the wagon, the burden on the productive sector increases. More must be extracted from a smaller group to serve the increasing riders.
That is what is happening in this country. If it is not reversed, the economy will stagnate and eventually implode. This conclusion is dependent upon nothing more than simple arithmetic. How bad is the imbalance today?…[It’s so bad that,] for now, just stick your head in the sand and pretend all is good. Self-deception is now the only thing left for the entire insolvent entitlement-addicted world!
Is The Decline Inevitable?
Of course not. As Lawrence of Arabia stated: “Nothing is written.”
The Economic Solution
The solution to solving the problem is quite simple for an economist. Merely reverse the process. Make it attractive for people to jump out of the wagon and begin pulling. For businesses, make it attractive for them to hire. Make it unattractive to be on the dole. Reverse the growth of government and you increase the size of the private sector. More capital is made available for productive activities rather than being squandered by government. Talent stops leaving the country when they are treated more favorably here, whether this be via lower taxes or less onerous regulatory burdens. Then, get government out of the way and let markets solve the problem.
The Political Barrier
For the political class, the solution borders on the impossible. Politicians have bribed the citizenry with goodies for votes. They have sold the notion that government is responsible for all good things. The economic solution runs counter to everything that politicians have peddled. Further, it reduces their power and ability to retain office, at least in a manner in which they are accustomed. It shrinks their perquisites. It shrinks their vote-buying ability. In short, it is virtually impossible for them to go along with such a solution.
What politicians thrive on is what created the current problems. Reversing this behavior is alien to them. They would not know how to behave under such conditions. Yet the economic solution is the only solution!
Do I expect politicians to change and save the country? No! Is it possible they could? Probably not, but “nothing is written.”
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://www.economicnoise.com/2013/04/05/the-country-is-over/ (© 2013 Monty Pelerin’s World)
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