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Anatomy of How an Economy Grows (Vol. 127)

Updated: Dec 20, 2023

It isn't Magic, it's Common Sense

I am repeating myself, but this is critical. An economy grows when output of goods and services is expanded. Duh!  


So why waste your time stating the obvious?  Because the factors that allow growth are what is important, and our federal government is REALLY missing the boat on letting these factors work.  Let me explain.


Growth comes primarily from the private, productive part of the economy. Resources consumed by the government are diverted away from their most productive use in the productive sector. When the government tries to be a part of that, they fail, because they are spending other people's money with no real incentives to be efficient and productive. All you have to do is look at any country that has tried socialism - 100% failure rate (sometimes government research contributes to knowledge which helps the private sector, but it normally does not produce goods and services for consumption). But I digress, I will save that for another day.


Growth comes from investment.  Investment comes when capital is available through saving. Saving comes from individuals who have income or capital available for consumption and/or investment. The more they have available, the more they invest. More investment leads to higher growth in an economy.


Here is the problem.  Big government, which we have here and many other major economies, takes money to run. If it happens to have a balanced budget (not many do) it is taking mucho dinero from us taxpayers in order to finance all of its spending. That means less for the private sector to save and invest.



 If it does not have a balanced budget and runs a fiscal deficit, like we currently do in massive amounts, it has to finance the deficit. There are two ways to do that.


1.      It can borrow from the private sector, taking the funds back from the public that it puts into the public by spending more than it takes in in taxes. 

2.      It can print money.  


The effect of each approach is different.  In 1, it reduces capital for investment but is not increasing the money supply and therefore is not inflationary, but constrains economic growth. In 2 it is inflating the money supply. If it inflates the money supply faster than the economy grows the output of goods and services, that is the definition of inflation. What it means for you, the taxpayer, is that every dollar you earn buys less and less. Both approaches are harmful and hurt growth and economic well-being. 


So, what is the best approach to growth in the economy? It is one where the government lets these factors do their work, and gets out of the way as much as possible:




Invest / Innovate

Produce - new/more/better products



In that order.


And then the formula for growth and prosperity is quite simple:







Unfortunately our government and most governments haven't gotten the message. They are busy growing government instead of growing the economy. The bigger the government the slower the growth.


To paraphrase Thomas Sowell, an outstanding American economist, the first lesson in politics is to ignore the first lesson in economics. 


Folks, don't just sit there - do something before our economy fails (See last week’s email, Yes Virginia, the Debt Crisis is Real) let your representatives know we want limited government and fiscal responsibility. Go to our website and Contact Congress and give them an economic lesson for the ages.



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