We all want things - lots of them. And we know that to get them, we have to trade with others. If you have something I'd like, I have to figure out a good "deal" I can make with you - I trade my resources for yours. Money is just the medium we use to make the process of wealth-trading smoother.
If "Joe" wants to buy a car, he's going to need some wealth he can trade with the car dealer. Where will he get it?
- He can create wealth.
- He can borrow wealth from others and pay it back later.
- He can trade wealth he already has.
- He can forcibly take wealth other people have created.
Assuming the fourth option is out (that one's only legal for the government), and assuming the third option isn't available to Joe, he's probably looking at a mix of the first two, right?
He might borrow some wealth-units (dollars) from someone else (like a bank), and then pay them back as he creates wealth in the future, at his job.
So far, so good. But what happens when Joe overextends - when he borrows more than he can possibly create and pay back?
That's bad news - for Joe and for his apparently unwise lender. The lesson is simple: just because you wish you could have it doesn't mean you can afford it. Even if you really, really need it, you'll still have to pay for it.
For indebted Joe, he'll either lose it all, sell his nice new car, or he'll have to figure out how to create more wealth that he can trade.
On a national scale, we want a lot of things. We want an ever-improving military. We want a strong economic safety net for our needy. We want to keep our promises to generations of Social Security and Medicare recipients. We want to add all sorts of government programs to make life a little better (like bridges and roads, schools, etc.). Plus, we want the government to be there to help us during times of disaster.
We WANT all these things - so how will we get them? Where will the wealth come from?
The government can:
1. Raise the rate of TAXES (take a larger percentage of the wealth people create).
2. Encourage people to CREATE MORE WEALTH (thus, increasing the income to the government without raising the percentage of taxes).
Most people can readily see that option 2 is more appealing - both the government and the people get richer. Since option 2 is the win-win, let's consider it.
If what America needs right now is WEALTH CREATION (not wealth redistribution - which really doesn't help anybody other than the politicians who propose it), what could the government do to encourage more wealth creation?
A few ideas, summarized:
- We could cut the rate of taxation on businesses. Businesses are where the wealth creation happens - where natural resources are pulled out of the ground and, step by step, converted into computers and cars and tools and Happy Meal toys (although I think the Chinese have pretty well cornered that market). Lower taxes on businesses would enable them to invest more of their money in growing their production, increasing pay to employees, increasing profits to shareholders, etc., all of which benefit the economy. See research here.
- We could open up more free trade with other countries, to benefit from their wealth creation and trade our goods for theirs. For example, if Colombia can do coffee farming better than anybody else - let's trade with them for the coffee. That frees more of us up to produce things that we can excel at - cup of coffee in hand, of course. See explanation here.
- We could reduce government involvement in industries like farming and manufacturing. Now, I'm not opposed to various regulations that aid the health and well-being of our citizens, but sometimes (often) the government overreaches here. The greatest obstacle to starting and running a successful business isn't competition, resources or capital; it's government! A reduction of federal regulation on business (or at least a transfer of that regulation to the state level) would boost business startups and success rates. See proof here.
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Unfortunately, it seems like the current crop of politicians in Washington are doing just the opposite - increasing taxes on "the rich" (read: business owners), offering special "protections" to American businesses (restricting and inhibiting free trade), getting involved as regulators and even owners of private industry (which is defintely not the government's Constitutional role). Politicans today speak of wealth "spreading", wealth transfer, wealth redistribution -- but what we need is wealth CREATION. Keep your radar up for politicans who think in those terms. Heaven knows we need them right now!
Stay tuned for Part 2, as we explore how wealth is actually "created" and how the free market makes it possible.
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