Economic Truths: Simple & Hard

Public Sector/Private Sector
One Drives While The Other Rides
by
Hugh Kemper

Three economic truths are: (1) the private sector creates wealth while the public sector redistributes wealth; (2) private sector wealth creation is a function of capital formation, productivity and innovation; and (3) public spending at the federal, state, and local level (as well as personal spending) to be sustainable must remain within the private sector’s capacity (and your personal capacity) to generate wealth.

Vermont has been in denial of these economic truths for some time. Vermont’s tax policies, public sector spending (particularly education spending) and restrictions on private sector growth have conspired to contribute to its current economic woes. Unless rectified, the outlook for Vermont’s economic future (and standard of living) is bleak.

The Federal Government has also (and remains) in denial of these truths. Federal spending has exceeded the private sector’s capacity to pay for some time resulting in an enormous and increasing national debt. Current spending (a.k.a. the stimulus package) focuses not on stimulating the private sector but on social spending and public sector projects. Making matters prospectively worse, the current administration’s predisposition towards labor unions will undermine the private sector’s competitiveness and thus its capacity to generate wealth. Unions are about more for less, i.e. more job security and more wages/benefits for less work.  That’s a union’s mandate from its members. That’s why they exist.

If your agenda is compassion, i.e. for those unable to support themselves vs. those who can and simply choose not to, you should be in favor of policies that promote a vibrant and growing private sector. This would generate funds for compassion as long as you don’t get too greedy, i.e. go too far with policies that discourage private sector growth and the work ethic of productive employees.

What is needed to right the economic ship are tax policies and regulatory policies that foster private sector wealth and public spending policies that tap but do not constrict the growth of private sector wealth. Failure to follow this prescription predestines a bleak economic future.

Comments

[Lazarus Long]

Another voice that will go unheard as the economic ship crashes upon the rocks of reality.

[d^2]

#1 is not true.

the public sector is able to create wealth indirectly by providing services. take, for example, the international stability created by a strong military, the local stability of a police force, the ease of travel of a highway system.

these are all value-adds, but it is very difficult to measure exactly how and where.

[Bob Zeliff]

The first economic "truth" has certainly proven to be extremely falable. The Wall Street private sector has distroyed several trillion dollars of wealth in the last year and wealth is still being distroyed today.
I see your letter as being a narrow perspective that serves a predetermined advocacy. This is old thinking, we need new thinking to get us all out of this mess we are in.

[Karen Kerin]

The public sector does not create any wealth, but in some limited instances does improve the ability of the private sector to create wealth. That said, The tax structure and government spending together with an outrageously restrictive permitting system are the entirety of the problem, not merely contributory to the problem.

[Jim Gatti]

d^2 offers a quibble that is beside the point and only 1/3rd correct in any event. Only national defense is strictly the province of the public sector. Private security services such as Blackwater do not conduct offensive military operations, and mercenary organizations are virtually always employed by a government.

Highways can be private and there are numerous examples of private highways both here and abroad. That there are not more is a pity. Had the Circ been a private project, it might have been built by now (Act 250 notwithstanding).

Security officers employed by owners of private property exceed those employed by public police forces by a factor that ranges anywhere from 3/1 to 5/1. A good local example is the UVM police force. These are not the stereotypical "mall cops." They are armed and can make arrests.

[Dennis Lukas]

I think every one that posted a comment will get to see how well the public sector,"government" handles creating wealth in the next four years.If all this spending creates nothing say good by to your pension and social security as we know it, there will have to be the same payment to every one to make it fair if the economy is bad.Also the extra money you will be getting in your paycheck, from the stimulus bill, you will have to pay taxes on next year, consult your CPA, or you might end up with a tax bill next April.

[txgordo]

Mr. Zeliff did not disprove the point of #1. The public sector is complicit in this present capital destruction, re: Fannie and Freddie. What's the new thinking? When government tells companies what to produce, how much, what to charge, and how to pay their employees. Mussolini ran that system - it's called fascism.

[G. Cross]

Gee, no recent comments on this site about that great econmic success story known as Ireland. What happened?

[Chris Campion]

How this, G? 4th highest in Europe. Want to talk about how France and Germany reduced their corporate rates in the past few years to spur economic growth - and it worked?

http://www.globalpropertyguide.com/Europe/Ireland/gdp-per-capita

[William]

Al Qaeda killed 3000 at the WTC I just wonder how many died from (heart Attacks) after working 35 or more years and losing 40% of their savings. We have 150,000 soldiers & trillions of dollars trying to stop the Al Qaeda terrorists. At the same time what would have happened if we had a 150,000 man army trying to stop the American born internal financial terrorists. Instead we had a 14 year head of the SEC quit because she was so embarrassed by the Bernie affair.

[G. Cross]

How about these two articles, Chris? http://www.economist.com/displayStory.cfm?story_id=13185013, or
http://www.economist.com/displayStory.cfm?story_id=13059781

[G. Cross]

Sorry folks, remove the comma at the end of the website address for the first link above.

[Wendy Wilton]

Ireland made a higher education virtually free for any citizen who wanted it, becoming the brain trust and the silicon valley of the EU, and retaining its young people.
VT had the opportunity to move in this direction in 2006 with the tobacco settlement money to be provided over several years. This was a good starting solution to our economic and demographic problems. The program would have sustained itself for a long period of time.
VT's legislative leadership chose to use the tobacco settlement $ primarily for Medicaid and Catamount instead, leaving scraps for higher education. This created a new healthcare program and bureaucracy with no plan to fund it after the settlement money runs out.
We gave up an opportunity to send our kids to college, support our colleges, and bolster our workforce in a significant way. The public is generally unaware of the choice that was made.
This economic policy decision by the general assembly remains my greatest disapointment because of its long term consequences on our state.

[Daniel Foty]

One of the more darkly-amusing aspects of the recent economic situation has been the re-emergence (from some sort of hibernation) of what our indispensable Australian friend Tim Blair calls "disaster socialists."

Showing even more patience than the legendary 17-year-locusts, the disaster socialists have been stewing and waiting for nearly three decades for a chance to jump out from under the bridge and try to tell us that everything has been wrong for the past thirty years. Oh, yeah, like the 1970s were so great.... and oh, yeah, have all those model "social democracies" really done so well during that time.

This silliness resembles the behavior of an individual who has very bad health habits (name your own list) and who as a result has continuing and recurring health problems (name your own list again). In contrast, someone else maintains very good health habits, and (in sharp contrast) enjoys very good health over a very long period of time.

Well, one day, the healthy chap contracts a wretched flu virus and is suddenly absurdly ill. It happens. But as surely as the night follows the day, the sickly guy starts to point at him and claim that this flu virus proves that the healthy guy really, really, really somehow wasn't really healthy during that time - and this proves that his own poor health habits are actually of no real consequence - heck, he may even claim that they make him superior after all.

For what it's worth, I do a lot of business in Europe, make multiple trips over there a year, and have been doing so for more than a decade. The "social democracies" that so many around here are so enamored of have had three decades of economic stagnation, structural double-digit unemployment, collapsing demographics, and an incredible outflow of talent that can't stay even if it wanted to do so. (During the last French Presidential campaign, both major party candidates campaigned in London - since, in terms of resident-citizens, London is now something like the seventh-largest "French" city.)

In contrast, it's been wonderful to watch - first-hand - how the eastern countries have had nearly 20 years of uninterrupted progress.... and are now sadly facing the first stalling-out of that since the delightful collapse of communism. Ponder that in the early 1990s, Ukraine's GDP per capita at independence had decayed to a mere $800. Ponder also that during the past decade, Estonia's GDP per capita has roughly tripled.

Over the long haul, it's pretty clear which approach produces positive results, and which produces stagnation.

I choose to work with those who are interested in producing positive results - because I have that choice and because I can.

Who's with me?