Why Good Economic Policy leads to Growth and Prosperity (Vol. 205)

Apparently this is confusing and misunderstood by many. Based on what I see happening here, and even more, in foreign countries, there is little understanding of basic economics. The proposals I see are ‘killing the goose that laid the golden egg’. They do not understand the implications of their proposals - clueless to how we got to be a rich country.  

In most of history, the economic system offered limited hope to improve your lot. There was rule by autocrats, dictators, or brutes who dictated all the rules. They did well by taking from others, there was no law that those in power had to observe, and most people were servient to those in power, with little opportunity to grow and prosper.  

Welcome the industrial revolution, John Locke, Montesquieu, and Adam Smith. Democracy, modern technology, civil laws and economic systems have arrived. Now the economic pie can grow, and we can all be better off without taking from others.  

Good economic policy has led to growth and prosperity for the masses. Poverty has declined remarkably during this period. But lately we seem to be moving away from good policy and paying the price.  

So, what is this good policy that has made us rich? It is complex but can be understood in abstract as boiling it down to 3 things: Limited Government; Sound fiscal practices; individual freedom.

Limited Government: In a civilized society, government (the public sector) is essential. Its primary functions are to protect the citizens and maintain the legal system of law and order. It also provides some services for the common good. But all of our goods and services that we buy and use are produced by the private sector. To finance the public sector we must take resources from the private sector to pay for these, through taxes or borrowing. The more we take from the private sector, the less it has to invest in producing more, cheaper, or better products for consumers. Therefore, a smaller public sector, minimizing what it takes from the private sector, means a larger private sector, which leads to more growth and prosperity for all.



Sound Fiscal Practices: The government pays for its costs in many ways, but today most comes from income and payroll taxes. The more government takes from we citizens, the less we have to spend or invest in productive capacity. So, if the government takes from us only what is needed to pay its expenses, then more is left for us to enjoy or invest in more production. Having a balanced (or near balanced) budget is very important as it minimizes what is taken from the public sector and consequently maximizes growth and consumption. If the government runs big deficits to pay for extraordinary spending, it must either borrow from the public, ‘crowding out’ private investment, or print the money, which is just a hidden tax called inflation. Big deficits are therefore very harmful to growth and prosperity and creates large debts and related interest cost.

Individual Freedom: In our republic, we have secured individual rights for all people. This is to protect us from tyranny of the majority. These are the ‘unalienable’ rights referred to in the Declaration of Independence. Laws are instituted to protect these rights, and reasonable rules and regulations are necessary to protect the public from abuse or harm. However, when the regulations become overbearing and unnecessary, this restricts our freedom to act and add unnecessary costs to produce goods. There are 175,000 pages of regulations promulgated from our bloated bureaucracy, and thousands of pages added every year, costing many billions of dollars, most of which has been put forth from unelected bureaucrats. Our elected representatives do not even know most of these exist. This over restriction of our freedom to act in our own interest seriously impedes growth as it hurts our productivity and increases costs to all of us.   

These concepts are not revolutionary; they are tried and true. The countries that follow these principles most closely are always the ones that have the highest standard of living. And just the opposite is true for those who do not follow these principles. In the ‘socialist’ countries that have completely ignored these ideas, there is widespread poverty. A free enterprise/market economy that follows these guidelines, result in the maximum benefit for its constituents; a socialist economy that ignores these ideas, has always led to impoverished constituents.  

Bottom Line

The United States grew rich following these principles and grew rapidly, with the poverty rates declining rapidly. In the last 100 years we have been gradually moving away from these principles and our growth has slowed. And with the constant overspending of our revenue, and large and growing deficits, our debts have accumulated enormously and if continued, will threaten our very existence someday.