Since government doesn’t produce wealth, it has to take wealth from the economy in order for it to operate. Even at its best, government operates at a net expense to a nation. However, it is a necessary expense, as long as the government protects economic and social freedoms which provide a platform for a stable and productive economy.
There is an optimal level of government, too little and the nation descends into anarchy, where no freedoms are guaranteed and a prosperous economy is not possible. However, too much government results in unnecessarily high taxes to fund it, along with stifling controls and regulation. Since the government takes money from the economy, it is removing capital that could be used to invest in more wealth creation and jobs in the private sector, the result is the loss of productivity (wealth creation), which is the basis of job creation in an economy.
Taxes, in and of themselves are not necessarily destructive and to the contrary are very much necessary to operate the basic functions of government to guarantee those necessary freedoms. However, they can also be a tool of tyrants that can cripple and even destroy an economy when they are too burdensome or when they take capital from the economy and destroy it on unproductive uses.
Politicians seem to think they have found a way around the burden of taxes through the justification provided by Keynesian economic theory.
A Keynesian economist would say that deficit spending stimulates the economy by creating jobs. Their theory suggests that if the government borrows, instead of taxing, and in return spends money, the economy will be stimulated regardless of actual productivity.
John Maynard Keynes, the father of Keynesian economics, explained his theory with this example: You can pay someone to dig a hole and pay someone else to fill it; the fact that nothing productive is taking place doesn’t matter. The spending alone will stimulate the economy.
John Keynes was only partially correct. In his theory, the economy can be temporarily stimulated via the credit of the US government. However, what Keynesians will not address is the long-term effects of this theory.
Logically, this cannot continue indefinitely. In fact, when asking a Keynes about the long run, he was famous for responding , “In the long run we are all dead”. This statement acknowledges the fact that eventually that form of economic stimulus will run out and have adverse consequences, but they brush it off by effectively saying, we won’t have to worry about it because we won’t be around. The problem is that in the long run ‘they’ may be dead, but someone else will still be alive and will be left to clean up the mess.
Keynesian economics debuted in 1936 through the book “The General Theory of Employment, Interest and Money”. The US government has been operating under this theory ever since. It has been a god-send to politicians, because they have been able to pay for ill conceived social programs without having to raise taxes, which is effectively buying votes with the wealth of future generations.
The problem is, we are now seeing the long-term effects, with staggering deficits, a huge National debt and an inflated currency. The government is having trouble continuing that economic policy. Borrowing has become more difficult, even from the Federal Reserve, because they have already printed so much money in response to the current crisis. America’s good credit is wearing thin.
The Austrian school of economics is the primary counter argument to Keynesian economics. It addresses the economy in a much more broad view, including the long run. An Austrian holds that the only way to have an efficient and sustainable economy, is through wealth creation and that environment is best created under a limited government, but one that is strong enough to protect the economic and social freedoms of a free society.
The course of Keynesian theory has not offered a way out of operating a government and an economy without having to face real trade offs. The cost of this theory is coming to light now that the latest keynesian bubble has burst and the American people are being forced to realize the destruction of trying to evade the reality of common sense economics. If America is going to be a sustainably prosperous and wealthy nation, it cannot continue to rely on borrowing wealth from posterity, which only shifts the current cost of government onto future generations. Instead, it will have to return to the principles of smaller government and true wealth creation by private industry.