As such we are experiencing something unusual and in need of explanation. First, let's acknowledge that economic growth creates jobs and not the other way around. Second, jobs are an input and not an output. They represent a cost of doing business rather than a goal of doing business.
In the long run, we can only consume that which has been produced. Wealth is created by production which can then be exchanged with other wealth producers for consumption.
Credit doesn't create wealth or economic growth. Neither does the redistribution of wealth create additional wealth or economic growth. Money supply growth creates only more money and no more production.
Long ago economist Frederic Bastiat put it this way in "That Which is Seen, and That Which is Not Seen," 1850:
"In all times, but more especially of late years, attempts have been made to extend wealth by the extension of credit. . . .
The first thing done is to confuse cash with produce, then paper money with cash; and from these two confusions it is pretended that a reality can be drawn.
It is absolutely necessary in this question to forget money, coin, bills, and the other instruments by means of which productions pass from hand to hand; our business is with the productions themselves, which are the real objects of the loan; for when a farmer borrows fifty francs to buy a plough, it is not, in reality, the fifty francs which are lent to him, but the plough: and when a merchant borrows 20,000 francs to purchase a house, it is not the 20,000 francs which he owes, but the house. Money only appears for the sake of facilitating the arrangements between the parties.
Peter may not be disposed to lend his plough, but James may be willing to lend his money. What does William do in this case? He borrows money of James, and with this money he buys the plough of Peter.
But, in point of fact, no one borrows money for the sake of the money itself; money is only the medium by which to obtain possession of productions. Now, it is impossible in any country to transmit from one person to another more productions than that country contains.
Whatever may be the amount of cash and of paper which is in circulation, the whole of the borrowers cannot receive more ploughs, houses, tools, and supplies of raw material, than the lenders altogether can furnish."
In the recent U.S. bubble years, we "consumed" too many houses with money we borrowed from the Chinese. Now we must repay the lenders the "houses" with new house equivalent production, to use Bastiat terms.
We borrowed to "consume" rather than invest. Accordingly, those borrowed funds were not used to invest in productive assets. So now we have no more production capability but a debt to repay with interest. That alone will restrict U.S. production for our own consumption for years to come.
But the problem is even bigger than that. To the extent government now takes even more wealth away from the own private sector in order to redistribute that wealth through public sector initiatives, we will further delay productive investment in the private sector.
Hence, we will underconsume and underinvest in order to pay back the "houses we borrowed" from the Chinese and others. Similarly we will undervinvest in future productivity due to the taking and redistribution of private sector wealth to the public sector.
Stated another way, both external loan repayments and public sector growth steal from future economic growth because wealth is first removed from the private sector. It's redistributed to lenders and the public sector instead. Thus economic growth stagnates, the economy stalls and unemployment remains high, as it has.
As a result, government tax receipts stay low and deficits and debt continue to climb.
Whether we look at the economies of individual European countries or our own, the public sector today is growing at a much faster rate than the private sector is creating wealth. Since this has been going on for a long time, sovereign debt levels are high and the prospects for sustainable economic growth are low.
Instead of investment, that private sector wealth has been used to feed the growth of public sector via redistribution policies. We've now reached the point where the public can't continue to spend what the private sector isn't able to supply.
Viewed from a long term perspective, we have less of a government spending issue than a private sector wealth creating output issue. Of course, we need to sharply curtail government spending as well.
The various borrowing and resulting debt bubbles have now burst, and economic activity has reached stall speed throughout much of the world. Nevertheless, public spending continues to grow, thereby draining funds from the wealth creating part of the economy.
In addition to us, Greece and many other European countries are even better examples of this stall speed economy in which we find ourselves. Greece public sector spending is more than 50% of that country's GDP. The same is true for Italy, Spain and others as well. We're gaining on them, unfortunately.
Thus, without economic growth led by private sector initiatives and investment, we won't get out of the stall speed rut anytime soon. That's too bad, but it's also too true.
Thanks. Bob.
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