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Severe Economic Nonsense


A good example of how liberals view federal spending and the role of the federal government in American society comes in the form of an article by Robert Reich, former secretary of labor in the Clinton administration.

Reich says that we just need to stop obsessing about the budget deficit. The problem isn’t out-of-control federal spending, he says. He says that what we need to do is just focus on growth and jobs.

In fact, get this: Reich says that the feds actually aren’t spending enough money. He wants them to spend even more. He says that that’s the way out of the economic morass in which our nation finds itself.

I doubt very seriously whether anyone can find greater economic nonsense than that.

I wonder if Reich would say the same thing to the Greek government. It’s financially busted. It’s a deadbeat government. It can’t pay its debts. It overspent, year after year after year. When it lacked the tax revenues to cover its ever-growing expenditures, it borrowed and borrowed and borrowed, accumulating mountains of debt, just as the U.S. government has been doing and continues to do.

The Greek government’s debt got so large that people finally realized that the government couldn’t cover its expenses and the interest on its debt with its tax revenues. People stopped lending the government money. It was essentially bankrupt, just like several cities around the United States that have overspent and over-borrowed.

So, what would Reich say? Would he say that the Greek government just needs to keep spending money? But how? How does a government spend money it doesn’t have? It certainly can’t borrow to keep spending because no one will lend this deadbeat government any more money. It’s busted! Broke!

Indeed, what would Reich say about those bankrupt U.S. cities? Would he say that they should just spend their way out of their financial difficulties? But how? Again, how does someone spend money he doesn’t have, especially when no one will lend him any money?

Maybe Reich would say that the Greek government should just print up a batch of new paper money and spend it. But it can’t do that because it’s in the Euro zone. It doesn’t control the inflation of its currency. And what good does an inflationary printing of money do anyway? All it does it provide a short-term artificial and fake burst of bubble prosperity that is certain to pop down the road, thereby making things even worse. If inflation was the key to economic prosperity, Zimbabwe would have been an economic powerhouse at the height of its hyperinflation.

What Reich and his liberal cohorts cannot confront is the fundamental problem: their welfare-state way of life has turned out to be a failure and a fiasco. They simply will not permit that thought to enter their minds. Thus, everything they think about and propose is oriented toward somehow reforming and saving their beloved welfare state.

That’s why they, like conservatives, love to fantasize and obsess about growth and jobs. What they’re thinking is that there isn’t any need to reduce any welfare-state (or warfare-state) programs. Instead, all that’s needed is to put everyone back to work, so that they all become good little taxpayers, whose taxes will then go to fund the welfare-warfare state. The fantasy and the obsession is that with everyone working and pay his taxes, the welfare state (and warfare state) will happily survive and continue expanding forever. Happy days would be here again!

The problem, which these people fail to acknowledge, is that the welfare state (and warfare state) itself has produced the economic collapse under which people are suffering, which is precisely what we libertarians have long said would ultimately happen. The burden of the welfare state, especially combined with the enormous burden of the warfare state, is placing an enormous strain on the private sector, a strain that would be made worse with higher taxes imposed on it. And even if things do turn around, it’s nothing more than a short-term fix. Just ask the Greeks. Or the Cubans or North Koreans, whose welfare state (and warfare state) has kept them mired in poverty for decades.

The U.S. government is spending a trillion dollars more than what it is bringing in with taxes. How is it doing that? By borrowing the difference, just like the Greek government did. The accumulated debt continues to grow, by the minute. And it’s dangerous, as the Congress itself implicitly acknowledges by establishing a ceiling beyond which no more federal debt can be accumulated. It’s not a coincidence that the feds have had their credit rating reduced.

Reich obviously views the federal government just like another market participant. But it’s not. The public sector is entirely different from the private sector. The private sector is the productive sector, the one that causes people’s standard of living to rise. The public sector is the parasitic sector. It depends on the wealth that is confiscated from the private sector.

Thus, contrary to what Reich suggests, the public sector doesn’t “invest” in anything. It confiscates privately produced wealth and spends it on welfare programs or warfare programs. It reorients wealth, from the private sector to the public sector.

Let’s assume that a private sector in a society consists of one million people producing $1 billion in wealth. To the extent that people save money out of that wealth, to that extent people’s standard of living goes up. That’s because savings means capital, which means increased productivity, which means higher standards of living. Thus, the key to a higher standard of living comes from savings in a society, not consumption, as Reich and his cohorts have long maintained.

Now, let’s assume that the public sector seizes half of that $1 billion. To that extent, the government has just reduced people’s standard of living by half.

Even worse, the government uses that money to attract half a million people from the private sector, to become welfare distributors, welfare recipients, DEA agents, CIA officials, or military soldiers. Those people are no longer employed in the productive sector. They’ve been removed by the attractiveness of the new jobs that the government has opened up in the parasitic sector with its confiscated loot.

So, there’s been a double negative effect. Not only has the government removed half-a-billion dollars of productive capital with its seizure of the money, it has also removed half a million people from the productive sector and lured them into the parasitic sector.

Now, along come libertarians and say, “It’s time to abandon this horrible and destructive welfare-warfare experiment. Socialism, interventionism, and imperialism have proven to be disasters. Abolish the income tax, which Americans lived without for more than 100 years, and dismantle all the welfare programs and the warfare programs. Lay off all the people in those sectors.”

That’s where Reich and other liberals and conservatives go ballistic. That’s what they call a fiscal cliff. They see the layoffs of those government employees and say, “Oh my gosh, that’s just going to make unemployment even worse than it already is!” Even worse for them is the thought that some people will be richer than others.

What they cannot see is that the people who are laid off from the parasitic sector will reorient into the private sector, the sector that now has its entire $1 billion in wealth that it is now free to keep.

That means a doubly positive effect—the private sector is free once again to keep all its capital and the people who were formerly in the parasitic sector are now producing also.

The fights between liberals and conservatives always assume the continuation of the welfare-warfare state way of life. The fights also assume that there is a solution to economic morass that has accompanied this immoral and dysfunctional way of life.

What’s different about libertarians is that we don’t get mired down in their petty disputes over the management of the welfare-warfare state. We offer the American people an entirely different paradigm — one that rejects socialism, interventionism, and imperialism.

We don’t argue over whether the poor should be taxed more or the rich. We don’t advocate streamlining the IRS code. We don’t debate tax loopholes.

Our position is very simple: the welfare-warfare state is an immoral way of life, one that leads nations to economic collapse and financial bankruptcy. It was a horrible mistake for America to have gone down that road. It’s time to acknowledge that before things get worse.

It’s time to dismantle, not reform, all welfare state programs and all warfare state programs, along with the entire income tax. It’s time to leave people free to keep everything they earn and decide for themselves what to do with it. That’s what a genuinely free society is all about. That’s why our American ancestors chose that way of life. That’s why libertarians today choose it as well.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.