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Memo to Politicians: Practice Good Economics - Part 1 (Vol. 148)

Updated: Apr 21

Many Policies are Nonsense and are Contrary to Good Economics.

I hate to be brutal, but the nonsense from politicians is making me ill - and it makes me wonder if they even understand basic economics. I suspect many really do understand, but political expediency seems to rule over good policy - the list of crazy policies and programs could fill a book.  But let’s just focus on some important principles this week and next week we will apply some of this thinking to policies and programs that make no sense.     

Bigger is not better.  Our Founding Fathers laid out a governing system which had the Federal government as ‘limited’ - and for good reason.  They feared that too much power at the federal level would lead to loss of liberty and the rise of tyranny.  So the items that were not the responsibility of the federal  government as defined in the Constitution were specifically left to the ‘states or the people’, as stated in Amendment 10 to the Constitution.  They were right, and the enormous federal government we have today has no resemblance to what they intended and the Government  is rapidly becoming our master, not our servant.  The consequence of the massive government is that more and more capital is taken from the private, productive, sector of the economy and given to the public, non-productive sector.  This is counterproductive as less and less capital is available to invest in a growing and prosperous economy.  This means less prosperity for all of us.  Key Fact:  when the government was smaller in earlier years, we grew faster and achieved one of the highest standards of living in the world.  

Markets Work.  We are a private enterprise market economy in which there is private ownership of property.  It is a Demand Directed economy where the demands of the consumers are what direct the functioning of the economy. That demand is fulfilled by businesses who produce the goods and services  we want.  Another economic system, socialism, is a Command Directed economy where the government owns the means of production and decides what to produce, not market demand.  This has never worked, but demand directed economies work because free markets work. Why? 

Incentives are the key.  It is human nature to do what is in our own best interest.  Adam Smith, who in 1776 published The Nature and Causes of the Wealth of Nations, is often considered the father of modern economics.  He wrote about the ‘invisible hand’ which guides our actions.  This is simply self-interest.  When we are free to pursue our own interests for our own sake, we have incentive to develop business to make money.  We do that by fulfilling market demands.  The consumer buys products they want and are happy their  wants are fulfilled.  We can make money fulfilling their demand, so we are happy.  It is a win-win for both.  That does not happen in a Command Directed  economy.

Government is needed.  A society cannot function without protection of our property and rights.  That requires law and order to protect the individuals and it requires the establishment of a government.  The most fundamental requirement of a government is to protect its citizens from outside forces and to protect property and rights of the citizens - so it must have a legal use of force, but only for the protection of citizens.  This is the Rule of Law.  It requires a military force, a police force, and a judiciary to enforce these protections. 

But the government has grown well beyond the limited scope envisioned by our Founders and spending has outpaced our revenue as we ‘buy votes’ with ridiculous programs we will discuss next week.  This spending has led to an unimaginable build up of debt as discussed in previous emails with no end in sight to additional debt.  This  is leading the country to the edge of the fiscal cliff at the end of the road on which we are currently embarked. If this continues unchecked, there will be severe consequences when we go over the cliff.  


These are basic concepts that most of us understand, but the extraordinary things a government often does, and many policies and programs that are enacted, often violate these basic ideas.  It has led to slower growth and policies and programs that make no sense, and do not accomplish the intended purpose - often just the opposite.  And this  has caused out of control government spending and deficits which have resulted in  debt that endanger our very existence.  

Next week we will highlight some of the misguided policies and programs that are not in our best interest as a country. 


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