Yes We Can!

A few days ago President Obama said: “We can’t simply cut our way to prosperity. We need to do what’s necessary to grow our economy; create good, middle-class jobs; and make it possible for all Americans to pursue their dreams.”

Let me translate this Washington doublespeak into plain English: “You must allow us to continue to tax, borrow and spend without limit because only we are smart enough to decide what is best for you and your family. If you tell us to stop, the markets will implode, the Treasury will default and we will all lose.”

Don’t believe him.

Federal politicians are fond of playing Chicken Little and speaking in riddles. For example, they claim we have a “mixed economy” in this country. In truth we have two, separate economies: the private market and the public market. These markets are as different as oil and water. Each expands at the expense of the other. And, like oil and water, they can’t and don’t “mix.”

The private market is where individuals voluntarily buy and sell goods and services. The public market is where individuals involuntarily participate in coerced transactions. The private market is based on the principles of (private) property, freedom and peace. The public market is based on the principles of shared ownership, administrative command and control, and political conflict. The private market operates spontaneously according to the will of individual participants. The public market operates compulsively according to the will of government politicians, bureaucrats and regulators.

Sadly, the public market is expanding, while the private market is shrinking. Consider the state of our GDP, which is a rough measure of the size of the American economy. At the beginning of the 20^th century, “the federal government collected three percent of GDP in taxes. A century later, it collects between 15 and 20 percent of GDP.” In 1903 federal spending amounted to 7% of GDP; in 2010, 40%. By 2016 the Gross Public Debt of the United States is projected to be over 100% of GDP. Even more shocking, the first issue of The Federal Register (The Code of Federal Regulations) was published in 1936 and contained 16 pages. In 2010 the number of pages in The Federal Register was 82,589!

Keep in mind that these figures pertain ONLY to the federal government. State and local taxing, spending, borrowing and regulating is another animal entirely.

Why should we care that the private market in the United States is being replaced by the public market?

Because economic theory proves that both parties are always satisfied by a voluntary trade. If you doubt this truth, remind yourself that human beings do not trade on a whim. Human beings act with purpose. If they didn’t expect to benefit from a trade, they wouldn’t voluntarily trade their labor for a wage or their money for a gallon of milk.

Granted, the benefit expected doesn’t always pan out. The satisfaction gained doesn’t always last. Conditions change and no one can know the future with certainty. But compare this result to the alternative.

At least one party will always be disappointed and unsatisfied in an involuntary trade. Why? Because if both traders expected to be satisfied, coercion would not be necessary in order for the trade to take place.

Consider taxation. Unless you believe the lie that citizens pay taxes voluntarily, politicians and bureaucrats force you to pay them your money. In exchange, you get something you don’t want, or more of something you don’t need, or something you want but could get for less on the private market.

For instance, would you voluntarily spend $10,000 per year to train Chinese prostitutes to drink more responsibly on the job? Of course not! Your family has more urgent and necessary wants and needs, like food, clothing, shelter, gas, utilities, a day at the beach and the like.

Still, federal politicians and bureaucrats recently spent $2.6-million of your tax money to research the drinking habits of Chinese prostitutes.

In this day and age we become desensitized by large numbers. Let’s put $2.6-million into perspective. Let’s assume that there are 260 families in your middle-class neighborhood. Let’s also assume that you and your neighbors pay an average of about $10,000 per family per year to the federal government (which is about right if your family income is $50,000 per year). It would take a year’s worth of taxes from your entire neighborhood to pay for that absurd study of Chinese prostitutes!

Remember, this example is just the tip of the boondoggle iceberg. President Obama’s proposed 2011 budget totaled $3.8-trillion in federal spending. Moreover, taxes from you and your neighbors only covered $2.2-trillion of this spending. The rest, $1.6-trillion, was put on the national credit card.

Are you starting to get the picture?

Taxes collected by coercion and spent on the public market by fat and pampered elites benefit and satisfy mainly fat and pampered elites. But don’t get stuck thinking only about wasteful spending and frivolous regulations. The truth is that ALL government spending and regulation transforms private markets into public markets.

Whether for Social Security, Medicare, the US military, the poor and downtrodden or Chinese prostitutes – the effect of government spending is the same. Goods and services wanted by the favored few are produced at the expense of goods and services wanted by the many. Dissatisfaction multiplies. Political conflict abounds.

Yes, we can tolerate some small percentage of public market transactions. But we didn’t build this great nation by conducting 40% of our business on the public market. Until recently, we respected private property and honored freedom. As a result, we were richly rewarded with peace and prosperity.   

Now we pay lip service to property and freedom. As a result, our prosperity declines.

But why? Why is the private market more productive, more efficient and more responsive to consumer demand?

Because politicians, bureaucrats and regulators do not know scarcity. They are exclusively consumers and spenders. When they run out of money to spend, they simply tax more or borrow more. Or, in a pinch, they print more. They do not understand that public market borrowing crowds out private market borrowing, that bad money crowds out good.

In the private market producers and consumers are one and the same. Traders in the private market do not enjoy unlimited resources. They are constrained by scarcity. Thus, they spend their money wisely and carefully on things they need and want most. Frivolous spending inevitably comes back to bite them.

Is it any wonder why incomes are falling and prices are up? Or why Washington thrives while middle America suffers? Or why politicians, bureaucrats and regulators plead for more spending and new taxes despite a raging recession?

Mr. Obama is wrong. We CAN “cut our way to prosperity.” We can cut spending, cut taxes, cut borrowing and cut regulations. Raising taxes on anyone will not only kill what’s left of the American private market; it will kill what’s left of the American dream.