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The State Is Main Problem Of Economy And Destroyer Of Welfare: Say Goodbye To Illusions – OpEd

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Once again, let us acknowledge openly the following fact: government expansion and socialist bias in the economic and social policies of the governments of developed countries over the past 20-odd years have stifled economic growth, increased the welfare of citizens, increased the debt burden, and actually distorted the competitive environment. The ever-increasing government spending, no matter what it is disguised as – stimulus programs, social subsidies, national security, etc., etc., is in the end simply a way for governments to take the benefits of tomorrow for their own benefit today.

In fact, there is no government spending multiplier, but there is private sector disincentives and government bloat. The bigger the government, the more rights it needs and the more controlling restrictions and obligations it will impose on those who actually finance it – the productive private sector and the most successful economic agents. The basics of etatism are the same for any government: the retention and expansion of power and the growth of distributive powers.

In this regard, it is pertinent to recall the squeeze-out effect arising from increased government spending and the expansion of public distribution. The presence of government reduces opportunities for the private sector, breaks down competitive incentives, suppresses investment and innovation activity, and amidst all this, increases costs by inevitably increasing the tax burden to finance government expansion.

The government spending multiplier itself is a fallacy. The essence of government spending is that it cannot, by definition, produce effective economic returns and translate into economic growth. The government does not invest, but spends at the expense of the resources of the productive private sector, while suppressing it with fiscal and regulatory burdens, as well as the inevitable inflation caused by the constant increase in consumer leverage. Every dollar the government spends means a one-dollar loss in the productive private sector. How’s that for a “multiplier”?

Any spending on anything that does not involve an economic return must be seen as a burden. Such a burden is inevitably incurred by society in order to manage public goods. But any costs must always relate to the productive part: can production cover these costs without significant damage to the entire economy, citizens, and future prospects? Costs must be part of the “business plan” and subordinated to the overall logic of profit generation and growth. When spending becomes the essence of the plan, however, it obviously means that the burden is transformed into the rights and opportunities of those who benefit from the growth of such spending. Let’s take a guess together as to who that might be?

If we guessed correctly, then it is not surprising that any crises caused mainly by the very same increase in government spending and stimulation of consumption beyond the capacity of production are extinguished by…even more expansion of government spending and even more leverage! This is certainly logical, since this policy is obviously a rut where nothing else can be done – otherwise the whole policy must change.

But what is completely unbalanced is that in cycles of recovery and growth, the government keeps expanding credit, increasing pressure on the private productive sector, and spending. Why? Because the interest group in power is pursuing its short-term electoral interests – long-term plans are too costly and complicated in today’s unstable world. What we end up with is a chronic budget deficit that requires funding – through new money or refinancing. And the result is higher taxes for everyone and inflationary risks that are bound to materialize sooner or later. Both are destructive for economic agents and producers.

The very notion that government spending can be an incentive for the private sector is completely false.

First, almost all government spending is not investment spending. This excessive spending is burying money in the ground. Among other things, they cause a host of negative externalities that reduce economic growth and worsen prospects.

Second, when it is said that “government investment,” for example, in infrastructure, can have an economic return, we can safely say that this is a deliberate lie, because if investment is economically sound, really productive, and has the potential for high returns – why do we need government? The answer is very simple – to maximize the budget and have even more leverage for centralization and redistribution. Such a government always seeks to verticalize economic exchanges. But it is obvious to any student that government cannot be as efficient a productive economic agent as the private entrepreneur.

Thus, so-called “economically efficient” government spending, such as on infrastructure construction, is robbing citizens and the private sector and reducing the efficiency of projects that could be many times more efficient. The efficient allocation of resources and benefits cannot be carried out by those who have a vested interest in spending and increasing budgets. Any inefficiency, such an entity will always consider that it has not spent enough and should spend more.

All of this is a clear illustration of why debt, deficits, spending and leverage continue to grow.

What the government is actually telling you is this: government spending helps the private sector recover from crises and strengthens its growth in a positive cycle. Deficits and government debt, on the other hand, are reserves for the private sector: after all, one dollar of government debt is simultaneously one dollar of savings for whoever bought that debt. This is practically MMT logic, and it is terrible in that it de facto states: all your savings are in the hands of the government, the most inefficient economic agent, which only collects and spends, and not in the hands of the private sector, which creates and pays! That doesn’t sound very inspiring. 

Government spending is a waste of capital. Any entrepreneur will tell you that the less his spending, the more unproductive, the better. At the very least, the intension to control and possibly reduce spending is the essence of the value-added mechanism. There are times, of course, when expenses have to be increased, but any private economic agent will think a hundred times before doing so, and will watch every penny he spends. Exactly the opposite is true of government, for which spending is the goal.

In fact, increased government spending, which is financed by the private productive sector through increased taxes and penalties, and by weakening purchasing power – that is, inflation – can rightly be seen as a form of quasi-nationalization. This is why the government does not restrain itself in expanding spending, neither in times of crisis nor in times of growth – it knows that it will not suffer too much from economic problems: it can always borrow more and more, collect more and more, and spend more and more, print more and more money. 

The recession that is already with us is the result of trillions of dollars in spending and hypertrophied monetary stimulus. All the stories about supply chain disruptions, Ukraine, the villainous Russian dictator and the cycle of monetary tightening today are nothing more than a way to explain things away with secondary factors, to pass off consequence as causation: all the points mentioned are, in fact, the result of government policy.

The global economy got its recession through hypertrophied government expansion – regular, monetary, fiscal. Cheap liquidity and gigantic government spending led to accumulated and deferred demand in Covid’s time – against a backdrop of obviously suffering supply, forced to finance exorbitant government appetites in addition to the costs associated with lockdowns. Not only did this not do any good, it created gigantic supply-demand imbalances, caused extraordinary inflation, put some countries – holders of dollar reserves – in distress, and narrowed the ability of private producers to invest much when it would have been appropriate for them to do so.

Every dollar of government spending is paid for by taxpayers through taxes raised by the government and through the inflation induced by that very spending.  Coupled with cheap credit, government spending aims to stimulate demand as a positive electoral driver for the political success of the government and the competing group that wants to be the government. In reality, this means making the taxpayer poorer and reducing their opportunities for development and growth.

Any government spending beyond a reasonable norm makes citizens practically poorer and reduces society’s capacity for future growth. Government spending does not stimulate economic prosperity, it does not make you freer, it does not expand your productive and consumer opportunities. De facto government spending nationalizes the economy and ties agents to government: “you can’t do anything else without us.” And in a moment of recession, extra-inflation, or on the contrary deflation, the dependence on government will become so strong that there will be no choice but to accept and support government. The only hope left would be for the government to accumulate as many resources and goods as possible and to be able to compensate citizens for any loss of welfare and opportunity.

 Everyone knows how bad a monopoly is in business: it doesn’t have to worry about optimizing costs and looking for efficiencies in a competitive environment – it got all of its customers and wiped out almost all of its competitors. The state is the worst form of monopoly because, unlike monopoly in business, it doesn’t think about profit and is only interested in spending as much as possible, and it forces its customers into its obligations by force. Let us not forget that the state is rational individuals – rent-seeking political entrepreneurs – maximizing their utility on the resources at their disposal and interested in minimal constraints on the use of those resources.

Isn’t it time for customers to give up some of the services of such a “monopoly” and sort out their own problems among themselves, limiting the power of political entrepreneurs, i.e., the government?

Judging by the recent congressional elections, that time has not yet come.

Paul Tolmachev

Paul Tolmachev is an Investment Manager, Economist and Political Analyst. He is Certified Professional in Philosophy, Politics and Economics (PPE Program), Duke University. Having more than 20 years' experience in the financial markets, Paul held management positions in leading international investment and wealth management firms. Paul is serving as a Portfolio Manager for BlackRock with more than $500 million in personally managed assets. He also is a visiting scholar at the Stanford Institute for Economic Policy Research, where he researches institutional and political economy, decision science and social behavior, specializing in the analysis of macroeconomics, politics, and social processes. Paul is a columnist and contributor to a number of international think tanks and publications, including Duke University, Mises Institute, Eurasia Review, WallStreet Window, RealClear World, Investing.com, The Epoch Times, L'Indro, etc.

One thought on “The State Is Main Problem Of Economy And Destroyer Of Welfare: Say Goodbye To Illusions – OpEd

  • November 20, 2022 at 5:45 pm
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    deep rooted malaise well explained. Democracy instead of being a free will for all has become a freebies for all without any qualms. Most govt. adopted democracy in the developed world suffer and fail to develop part of developed world due to freebies which are a drain on the economy and resources in general. subsidies, public distribution have given rise to dirtry wealth which has been begotten without having to pay while enrichin the individual robbing the society. Your analysis in context with different ligua or vocab would stand most appropriate for india.

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