Is More Government What this Economy Needs

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With the budget debates continuing between the current administration and the house, the question of raising the debt ceiling has become a hot topic. Just recently, the president argued that republicans resistance to raising the debt limit is like putting a gun to Americans' head.

Whenever I hear the government talking about spending more, it means just one thing--bigger government and more taxes. In this unstable economic situation, is more government and thus more taxes something the economy really need?

I will answer this question as objectively as possible using analogies most of us can understand.

Basic Economics

The basic law of economics involves supply and demand from the macro view. When you get down to the micro view, it involves the behavior of people and the choices they make on how they spend their money for their self-interest.

Thus, if you only make a modest salary per month, and are in need of a good commuter car, which car would you get?

  1. Chevy Volt (35 city/40 hwy mpg; new $40,000 msrp, $32,500 with government tax credit)
  2. Hyundai Accent (30 city/40 hwy mpg; new: $14,500 msrp)
  3. Toyota Prius (51 city/48 hwy mpg; new $23,500 msrp)

More than likely you will buy a Hyundai Accent or maybe a Toyota Prius. The Chevy Volt is just plain expensive. If most people felt the same, what do you think will happen to the company that makes the Volt? Well, if they kept on doing the same thing and not delivering something people demand or need, they will not make any profit, and eventually go out of business. Unless the government bails them out again.

Because most people will buy either the Hyundai Accent or the Toyota Prius, those two companies will continue to make profit and grow over time. While Chevy continues to get a handout from us, via US government stimulus programs.

More Government: What does this mean?

More government means one or more of the following things:

  1. The government establishes new agencies to regulate private companies
  2. The government stimulates the economy by spending on roads and infrastructure (e.g. road resurfacing, high speed train, building roads/bridges, weatherizing homes)
  3. The government stimulates the economy by saving government jobs

The government definitely creates jobs--more government jobs, that is, to run the new agencies it puts in place. Case in point--the EPA (Environmental Protection Agency). The EPA was established by President Nixon in 1970. It employed just over 4,000 people then. Today they employ just over 17,000, and at their peak they employed over 18,000 people. They started out with a budget of $1B of discretionary spending. Today, they are at a budget level of just over $10B! Next will be the agency that will run our government healthcare system. I'm sure this will create jobs as well (government jobs to be exact), and probably at a faster pace than the EPA, and with a budget to match!

Stimulus money for roads and infrastructure definitely helps keep jobs. It also helps create temporary jobs to help with the construction work. However, when the project is done, and the money runs out construction companies goes back to their normal routine of finding projects, and lets go of the temporary help in the process. Basically the money is sucked into the economy and is used up. it causes local governments to spend money on things that would otherwise fail because they had no money. At the end of the day, it can cause a little blip in the economy, but it basically comes and goes. In my neck of the woods, I see a lot of road re-pavement (even those that don't need it), and yet the economy remains dismal.

Some of the recent stimulus money have gone to save the jobs of teachers in various states. In my state, the money was able to keep teachers for another year; but this fiscal year the money ran dry. Our district was in a hole several million dollars, and couldn't depend on the state government to bail them out. That's because the state itself had its own fiscal problems to deal with. Basically, the money didn't stimulate the economy, but instead just postponed the inevitable.

How More Government Helps the Economy

So how does more government help the Economy?

It doesn't.

Government is a money sink. It is unlike a business; it doesn't produce anything nor provide a service you can get elsewhere. But it can certainly suck in money faster than a vacuum cleaner. Check out a real time view of the US debt at http://www.usdebtclock.org/. Current US debt is just over $14,000,000,000,000; and it employs just over 4 million federal employees right now!

Growing the government isn't the answer. What government can do is encourage private business development and avoid legislation that discourages business and job creation. More jobs means more taxes from people who work.

I'm Broke, but I Want Higher Credit Limit

What?!

The government wants to raise the debt limit. This is tantamount to giving someone, who is broke and can't figure out how their going to pay their bills, a higher credit limit! What is wrong with this picture?

When applied to the government, it just means more taxes. More taxes mean less money in the pockets of consumers who really are the ones that cause the demands in goods. Less demand means less production of goods. This can lead to layoffs or downsizing if a company cannot sustain a larger workforce. Layoffs mean that the economy is getting worse.

The Bottom Line

The Government should stay out of the way and let the laws of supply and demand dictate what should be. Production of what people want or need will rise, causing a more permanent impact to the economy. Government induced production has some impact, but it is only temporary in its effect--lasting only as long as the money provided lasts.

Thus, this economy doesn't need more government; it needs less!

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What do you think? 4 comments

CHRIS57 profile image

CHRIS57 5 years ago from Northern Germany

Interesting question you rise in your hub. But may i have a different opinion?

First some thoughts about people. People are like stubborn donkeys. You can move them by hitting on their back or by showing them where the sweet carrot is. When donkeys (people) see the carrot, they just run for it. So it is all about incentives and smart administration can be identified by presenting good, sweet carrots.

So - i like your little car example. I suppose the Volt has to be the car with the best mileage. So first the carmaker has to work on that, even if that makes the car more expensive. Then government has to step in and place the sweet carrot carefully. First incentive: increase price of gas, double it, tax it. second incentive: Hand that freshly earned tax revenue over to the buyer of the Volt, not just the small tax credit of today. Give 50% tax credit or more.

What will happen? People start buying the Volt, because that would be the best deal. Puts people to work, them paying taxes, them contributing to the GNP. And there will be less dependency on gas, on fuel. If that was government´s objective, fine.

You may consider this to be a fairy tale. Well - it is not. There are governments in the western world who pursue exactly this type of business, you may say intervention. And things work fine, at least better than in the US.

There it is not about cars, it is about green energy. It is about 90% tax credit for photovoltaic energy production, it is about high tax credits and consumption priority for windpower. Took some time but now almost 500.000 people work in that sector, manufacture generators, produce equipment. Result: low unemployment, high tax revenues, solid economy. This summer some 20000 government employees lost their job, because work consultants for getting unemployed back to work were no more needed.

All this is everything else but keeping governments fingers out of intervention, there is no laissez faire. But there are firm objectives combined with the knowledge about showing the sweet carrot.

The US economy was run into this mess by not intervening, by not showing a perspective. Please, don´t talk about less government. That is the wrong direction in this situation.

However i have to admit that US governments always face elections all two years, almost prohibiting any long term, strategic planning.


forlanda profile image

forlanda 5 years ago from US of A Author

Thanks for taking the time to express your opinion. This is what makes this country great. Having lived in another country myself, I can really appreciate this freedom.

That said, when government gets involved in areas they have to subsidize to sustain, it is not a good thing because we the tax payer end up carrying the burden. There are some exceptions to this of course in cases where government is able to help the private sector get over any initial cost prohibitive hurdles to a product that has big demand.

Any products can be in big demand, especially if the government subsidizes the company who produces it, thus resulting in a price that is very attractive to the consumer. This could be done with the Chevy Volt.

But somewhere along the line, it is going to cost the consumer in taxes because the government has to get money to help pay for the subsidy. So on the surface, the government can impact the demand, but if the demand requires government to sustain it, it will cost us.


CHRIS57 profile image

CHRIS57 5 years ago from Northern Germany

I understand sentiments in the US to keep government out of the money cycle.

The reason is that in America there is no real history of redirecting money directly from tax collection to subsidies. If redirection was done as an outcome of political priorities and performed with transparency, i think there will be little objection by the people.

An example: Roads are in bad condition. A lot of repair work and road construction is needed to maintain good roads and possibly build new connections. What about raising taxes on gas that go directly into road construction. Everyone will grunt at first because of higher gas prices but after the potholes on his favourite highway are fixed, he will accept. Some transparent accounting of tax usage will assist. And by the way, your little example about the Chevy Volt may get more attractive because of higher gas prices.

Money simply collected by the government without immediate tunnelling into political priorities will stick to administration until it is evaporated.

May that is the problem with the US. Too much laissez faire, too little intervention, too few priorities,if we ignore the affection of Bush to wargames and of Obama to medicare.


forlanda profile image

forlanda 5 years ago from US of A Author

Thanks for commenting again. Yes, you may be right on that one. I think with transparency, people will be more apt to pay taxes since they can see a direct correlation between what they pay and what they gain.

They way things are here, even in California, it is really difficult to tell where our money is going. It really looks like it is just being fed into the government machine which only gets bigger, regardless of economic conditions.

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