Parasites, Bureaucracy and Soviet Boots

The real economy declines. The parasites multiply. See chart below…

First, a look at the markets:

Stocks went nowhere yesterday. Maybe the feds had taken the day off; MarketWatch charges them with manipulating share prices.

Gold, however, staged a $17 rally. The correction in the gold market may be over. Or it may not. This market has more surprises in store; we’re certain of it.

“I think you’re wrong about something,” begins a letter from a Dear Reader. “You act as though government spending were always a crime, a sin, or at least a waste of money. In fact, soldiers working for the US government protect the country. Roads make it possible for you to drive from Bethesda to Baltimore (I don’t envy you there). Even the paper pushers are necessary; bills need to be paid. Retirees need their checks. Government spending may be inefficient, but it is still a real contribution towards GDP.”

Our pen pal is correct. Government employment includes thousands of honest people doing honest work. Some of it is useful. The trouble is, since it is not subject to market pricing, you never know how useful it is. When is something worth doing? When people will voluntarily pay you for it. How do you know when you should do more of it? When the risk-adjusted profit you make from doing it exceeds the rate you could get from lending your money to the government, risk-free. Why are so many people willing to lend the government money now? Because the rate of return from other investments is so low…and the risk is so high.

Markets are constantly discovering how useful and desirable things are. Prices change all the time. One thing rises…another thing falls…always directing producers and consumers towards the best use of their money.

But government highways, wars, and bureaucracies aren’t priced by markets. So you never know what they are worth. In a real war, a country may be willing to pay its last dime to beat back the enemy. But what about ‘wars of choice’ such as Iraq and Afghanistan? How much are they really worth? No one knows. And no one really cares. They become just a few more government programs…eternally sucking away resources from the real economy. There are dozens…hundreds…of government programs set up during the Great Depression that are still alive. Each one has grown year after year…and each one now employs thousands of well-paid workers. And each worker not only gets his salary check, he also gets health care and retirement benefits…and he needs an office to work in and a place to park his car. And what is he doing? What would happen if he stopped doing it? No one knows.

But here at The Daily Reckoning we can take a guess. Ninety percent of Washington could take a hike…and life would go on as well or better than it was before.

Out of 10 government employees, probably 2 do useful things…things that we would willingly pay for if they weren’t done for us by the government, though we would almost certainly pay less for them than they cost us now. Five others do things that are not worth doing at all – things that are purely wastes of money. And the other three do things that destroy wealth…things that actually make the situation worse. Those three are economists. Or lawyers. Or who-knows-what.

Of course, people in the private sector do stupid things too. Just look at the fellows writing subprime mortgage contracts. Or the fellows performing rap music. Or the fellows selling televisions. But, hey, that’s just our opinion. Let the market (the consumer) decide! It’s not up to us. Thank God.

By and large, in the private sector people get what they want…and what they’ve got coming. People who waste money soon don’t have any to waste. People who make bad business or bad investment decisions go broke. Mistakes are self-correcting…unless the government steps in!

In the public sector, it ain’t so. Mistakes are self-perpetuating. The last thing a bureaucrat wants is for his mission to disappear. If he is fighting illiteracy, it is a fair bet that fewer children will learn to read. If he is fighting poverty, it is a fair bet that more people will be poor. If he is fighting terrorism, put your money on terrorism.

Failure is rewarded with bigger budgets, while success is self-extermination.

So, as the percentage of the economy dictated by the government increases, so does the waste, the inefficiency, and the counter-productivity. As the Soviet Union discovered, you can increase GDP by government order…but all you get is a whole lot of nothing. We traveled to Russia at the end of the Soviet period. By then, Russians had been reduced to unimaginable poverty. All they had to sell tourists was equipment looted from the army. We bought a pair of leather boots for one US dollar. Best buy we ever made. We still wear them, 20 years later. Two weeks ago they kept us from losing a leg, when we slipped while cutting up a tree with a chain saw. The saw cut into the boot but didn’t even scratch our leg.

Why is this little discussion of government spending important? Because it is ‘the rest of the story.’ Economists are pushing government spending as a substitute for private spending…and government jobs as a replacement for jobs lost in the private sector. Nearly 5 million jobs were lost in 2009 – almost every one of them in the private sector.

But here come the feds to the rescue: