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Federal “Grants” and “Stimulus”: Too Visible A “Hand” In Our Economy

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Famed theoretician of economic thought Adam Smith, in his landmark work “The Wealth of Nations,” published in 1776, introduced us to the concept of the “invisible hand” to describe the actions of entrepreneurs in competitive free markets.  As the Library of Economics and Liberty puts it:

“Someone earning money by his own labor benefits himself. Unknowingly, he also benefits society, because to earn income on his labor in a competitive market, he must produce something others value. In Adam Smith’s lasting imagery, “By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”1”

Mr. Smith, hundreds of years ago, identified the magic of free market competition whereby entrepreneurs take risks and labor untold hours and endure untold hardships to bring products to market that consumers value enough to part with their own hard-earned money and thus in market after market and for product after product, the functioning of the “invisible hand” matches buyers and sellers.  Flourishing businesses are created…businesses employee workers…and workers earn wages with which to purchase goods and services…and the private sector economy thrives. 

At roughly the same time, ironically enough, and across the pond, as they say, America was busy wresting herself from control by England, and the ideas that would soon become a country dedicated to the freedom of individuals and to markets and to limiting the influence and power of the federal government, were being formulated by Jefferson, Madison, Washington, and other founding fathers to include in their country’s new Constitution. 

The magical combination of capitalism with its free market competition combined with a country of entrepreneurs unhindered by burdensome and profit robbing taxation and blessed by their Creator, generated the most extraordinary explosion in economic growth ever witnessed by humanity.  In just a short time span, historically speaking, the United States of America rose to become the economic juggernaut of the world with a standard of living unequalled anywhere.

But sadly now, the “invisible hand” phenomenon of free markets is being challenged by a very visible hand in the mix and that is of course, the “redistributive hand” of government.   Just this week, for example, the Southeast Energy Efficiency Alliance, a “non-profit” group of green policy advocates, announced in a headline an award to Charlotte “to Infuse $400,000 into city’s neighborhood energy challenge.”  Where might a “non-profit” group get $400,000 to award to Charlotte you ask? In this instance, Ben Taube, the Executive Director of SEEA, when asked where the funds for this award originated stated, “the funds are coming from DOE through a competition grant we applied for.” 

Funds….grants….stimulus….the terms used in “government speak” never get to the heart of the matter.  These aren’t funds….these are taxpayer’s hard earned dollars that the government is taking for a political purpose.  This isn’t a grant…it’s an unconstitutional, politically motivated theft of freedom and liberty from Americans who haven’t even been born yet.  The press release that accompanied the announcement of this “grant” failed to mention that the federal government, the redistributor of these taxpayer receipts, is for the current budget year anticipating a $1.56 trillion dollar deficit, an all-time high for the country;  that the federal government is incurring a  one-year deficit that is an alarming 11% of the entire gross domestic product and that these annual deficits will grow in the out years due to, you guessed it, an alarming rise in spending to redistribute taxpayer dollars for socialized healthcare and for unfunded entitlements that will require a doubling of current personal and corporate tax rates to fund.    

Its easy sometimes, in the rush of following government propaganda or in listening to compromised media sources, to forget the single most important rule of the private and public sector economy and it is that every dollar that is spent in the public sector must first be taxed or borrowed out of the private economy.  Because government dollars must first leave the private sector, the opportunity cost of not spending those dollars offsets the dollars spent by government  and hence there is no net economic growth from government spending, only a redirection of dollars to the government’s purpose. 

So while politicians in Charlotte gather to celebrate the “redistributive hand’s” handy work, someone needs to say thank you to the taxpayers who contributed their hard-earned dollars to pay for the “grant” even though they had no say in the matter.   And perhaps more importantly, we need to examine the growth neutral economic impact of the “redistributive hand” against the economic effect of Mr. Smith’s “invisible hand.” 

The effect of $400,000 dollars of private sector investment by Mr. Smith’s “invisible hand” is truly amazing.  Economists today can, with some degree of accuracy, predict the change in output that will result from a change in investment…this is called the output multiplier.  Even with today’s exorbitant and punitive corporate tax rates, $400,000 of private sector investment in Charlotte will reap close to $1 million dollars in increased economic output for our city.  That’s one million dollars of pure economic, tax paying growth with which to pay wages and benefits for workers who themselves generate, you guessed it, more economic growth and true stimulus.  And all of these wonderful benefits accrue with no lasting debt with which to saddle future generations.

What a wonderful thing Mr. Smith’s “invisible hand” truly is. 

Notes:

1.  Library of Economics and Liberty web site…by David R. Henderson from Smith 1759, part I, section I, chap. I, para. 1; available online at: http://oll.libertyfund.org/192/39008/908774.

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