If the Great Depression teaches us anything, it is that government spending does not create wealth and does not create economic growth. Both Presidents Herbert Hoover and Franklin Roosevelt followed the recommendation of John Maynard Keynes, a very high profile British economist who lived during the Great Depression, of spending a lot of money government did not have in tax revenue in order to stimulate the American economy, however, the economy was anything but stimulated. Most people remained in dire economic straits for some sixteen years from 1929 to 1945. Unemployment reached a high of around 25% and economic growth, in general, was pretty flat. The years of World War II cannot exactly be claimed as economic boom years for war destroys rather than creates individual wealth, and the rationing of consumer goods and services is hardly characteristic of economic growth and building wealth.
It really was not until after the end of World War II when government spending was reduced and individuals were allowed and had an incentive to save again that economic growth and wealth building returned. Yes, consumers benefited from the construction of Hoover Dam, Golden Gate Bridge, and Mount Rushmore, and all of the war goods that were produced, but all of this and the millions of dollars government spent beyond tax revenues allowed the depression to last as long as it did.
Economic wealth is created through the use of land, labor, and capital. Through the use of capital equipment the growth of economic wealth takes place on a multiple scale. An individual with a computer is more productive than an individual without one. An individual can grow multiple amounts of crops with tractors and other machinery (capital) than one without such items. This capital equipment, though, can only be produced if personal consumption is reduced for a time. This is what is known as savings. By not spending all of what one earns on consumption, one can then have enough to produce the capital equipment necessary to create even greater amounts of wealth for even more individual consumption to take place. It is the reason individuals save to get an education. The result is economic growth for more people. This is how savings creates economic growth. Spending only consumes. Even people saving their money under mattresses helps others build their economic wealth through the resulting lower prices of goods and services.
Production drives consumption. The whole notion that spending drives consumption is not correct, it just appears that way. It is very much like watching the sun move across the sky and deducing that the sun revolves around the Earth. That was the prevalent idea held by many for centuries. As a matter of fact if you believed otherwise, you were considered a heretic. Not until Galileo and Copernicus was it proven that the Earth actually revolves around the sun. So it is in economics. One cannot consume what has not yet been produced.
Individuals confuse money with wealth. If money were really wealth, then everyone ought to just stop what they are doing, go home and print money. Most individuals understand the result of that scenario, not to mention the jail time that would be required. However, there is one entity that has the capability of “printing” money. It is the Federal Reserve System, created in 1913, which essentially paid for most of the massive government spending that caused the Great Depression in the first place and allowed it to continue for the extended period of time it did. It is also the entity that continues to pay for all of today’s excessive government spending creating the depression that is currently underway.
The Federal Reserve, excessive government spending, and the encouragement for individuals to spend rather than save is causing economic destruction not economic growth. If economic growth and job creation is desired and not depression and war then, the Federal Reserve System and the excessive government spending must be eliminated so that individuals will be encouraged to save in order for jobs to be created.
Government spending is paid for out of government taxation. Government tax revenues are paid for from the productive capacity of private individuals. Increased taxation from increased government spending means individuals have less with which to decide how they choose to use their productive capacity. Economic growth is squashed.
Savings is required in order for economic growth to result. Individuals therefore need to be encouraged to save, rather than spend. To encourage savings requires individuals to be allowed to keep all of what they earn so that they can make that decision. There is no incentive for individuals or businesses to save today because of the vast amount of government rules and regulations and legalized counterfeiting (inflation) caused by the Federal Reserve System to pay for the massive amounts of government spending in excess of government tax revenue.
Savings creates the ability to spend and production creates the ability to consume.
Howard J. Blitz
The Freedom Library, Inc.
July 2, 2011