Paying for the Mistakes of the Public Economy

Carmen Reinhardt and Ken Rogoff say that “higher debt may stunt economic growth.” Hey, this is getting interesting. Maybe we’re not entirely alone here at The Daily Reckoning.

This is the second point we were going to make. For the most part, there is no recovery happening. And the part of the recovery that is actually happening is a fraud.

You can’t cure a problem of too much debt by borrowing more…even if the borrower is the federal government. When the private sector was over-borrowing, it was absorbing resources it couldn’t really afford. Plus, it was sending the wrong signal to producers, leading them to believe they had real customers on the other end of the line. What they had were people pretending to have more purchasing power than they really had. And when the credit got turned off, these customers disappeared, leaving the manufacturing sector with too much capacity and the retail sector with too much floor space to sell it.

Now, the government is doing the same thing – taking up resources it cannot really afford…and redirecting them to uses that it really can’t sustain. What’s more, this use creates a phony GDP… production for which there may or may not be any real demand. It looks like real GDP to the economists…after all, people are making money and spending it. But is anyone really any better off by building a piece of expensive machinery that gets shipped to Afghanistan at enormous cost and is later abandoned there? Or how about hiring another 1,000 bureaucrats to process health care paperwork? Is the world a better place as a result?

In the private economy, people are always making mistakes. People buy things they really don’t need with money they really don’t have. Then, they pay the price.

In the public economy, people are always making mistakes too. But since the person who makes the mistake is not the one who pays the price there is little incentive to ever recognize the mistake or to stop it. Just the opposite. In the public economy, people are rewarded for failure. The worse a situation becomes…the more money gets thrown towards it. Just look at Detroit!

Government mistakes become eternal…programs that can’t be stopped because too many jobs would be lost…useless community centers that can’t be closed…wars that go on forever…the bureau of this…the department of that…

More and more parasites…fewer and fewer honest workers. But parasites do not build honest prosperity. They just waste resources.

Driving home from work yesterday, we saw a billboard with a curious message:

“Birth defects? Call John McClure. Lawyer. Get what you deserve.”

Yes, even in the private sector – with generous help from the government court system – the parasites are everywhere… And always with the same message: get something from someone else…without working for it.

It all goes on…until it all goes broke.

The Daily Reckoning