Signup for our free newsletter:

Government Spending is Making You Poor

Written By Geoffrey Pike

Posted November 8, 2013

When it comes to politics, there’s a lot of talk about taxes when dealing with the economy.

In more recent times, there’s been a lot of discussion about deficits and the overall national debt. In addition, there is talk about creating jobs, particularly when the unemployment rate is high, as it has been over the last five years.

One issue that is discussed, but to a lesser extent, is overall government spending…

For fiscal year 2014, the federal government is expected to spend approximately $3.8 trillion. This does not include state and local government spending, which would include trillions more.

While subjects like taxes and the national debt are important, the primary concern should really be government spending. Total government spending is one of the root causes of our economic problems. If government spending were drastically reduced, then the other issues become less important — or non-existent.

Let’s say the federal government’s annual budget was reduced to one-tenth its current size at just under $400 billion. Total tax collections (on a national level) could be reduced to this same amount, and we would no longer have an annual deficit. While this in itself would not eliminate the national debt, it would keep it from growing any larger.

At a total tax level of $400 billion, this would also eliminate most fighting about taxes. The income tax and payroll taxes could all be eliminated. Just keeping in place tariffs and excise taxes alone would fund most of the government.

You might even be able to get some voluntary tax donations (oxymoron?) if there were virtually no federal taxes.

Now, I’m not advocating any one particular tax over another; the point is that if total government spending were really small in comparison to what it is today, most people wouldn’t be up in arms about paying 1%-2% of their total earnings toward federal taxes.

It would make the whole issue of taxes far less relevant.

Government Spending Misallocates Resources

Virtually all government spending is a misallocation of resources. You may like one or more particular government programs because you perceive a benefit, but this benefit comes at the expense of someone else.

Aside from most or all government spending being redistributive, it also misallocates resources on a grand scale. The government is spending money on things that consumers would not have voluntarily purchased in a free market environment.

The best we can hope for is that the government spends money on something that you would have purchased anyway.

However, it is almost impossible that millions of other people would have made the same decision, had they been allowed to keep their own money and use it as they saw fit.

If the government did spend money on something that everyone would have bought anyway (which is virtually impossible), then this would mean the government program was unnecessary in the first place — except in that it likely redistributed wealth, because not everyone was taxed at the same level.

In addition, as with all government programs, administrative fees would have consumed some of the wealth that was taken by the threat of force.

If the government started a program of handing out free big screen televisions to every American, most would argue this program is a huge waste of resources. Now, some Americans would not be affected too much if they were planning to buy a big screen television anyway.

But you have to think of the tens of millions of people who didn’t want a new television — and would have preferred to use the money for other purposes, such as taking a family vacation, donating those funds to a charity, saving or investing, paying down debt, or any number of things.

Forcibly collecting money through taxes to fund a government program of free televisions would also distort business activity, whether it were funded by direct taxation, through inflation, or through more debt.

It would encourage people to change their behavior to avoid paying the extra taxes.

This government program would be beneficial to some people, particularly those working and investing in the television and television sales industry. But it would come at the expense of millions of taxpayers.

In this particular example, it is easy to see how resources are being misallocated. Not everyone wants a new television. If they do, they can simply go out and buy one, if they can afford to.

We don’t need a government program to allow us to do this.

It’s not always obvious with all government spending, but you always have to ask if this is the exact way that millions of people would have chosen to spend their own money, had they been allowed to keep it…

Would have spent it at all? Or would they have saved it for a rainy day?

The Problem

Of course, the problem is that the majority of Americans still do not favor a dramatic cut in government spending.

Most Americans will say they want less government spending. And most will say they want a balanced budget; but then we come to the problem of what gets cut.

You can get most people to agree on cutting some things — such as foreign aid, Wall Street bailouts, and some pork barrel spending, just to name some of the less desirable government spending… However, most people are not in favor of massive cuts if it includes the very government programs they are benefiting from.

To cut the federal budget to one-tenth of its current size would mean eliminating almost everything.

It means an almost total repudiation of empire abroad and the welfare state at home: It means an end, or close to it, of the so-called entitlement programs like Social Security and Medicare.

Assuming no interest payments on a national debt, a $400 billion budget is not insignificant. It is extremely small compared to what we have now, but it could still fund the court system and a small military for defense only.

But with over 300 million Americans, it would still mean more than $1,000 per year from every single taxpayer. That’s still a lot of money.

This should serve to show you how much is wasted now, with the cost of federal spending being well over $10,000 for every single American.

(Of course, this includes children and everyone else. The average working adult is paying far more than $10,000 per year on average.)

What Are You Getting?

Are you getting $10,000 or more worth of services from the federal government?

If you are a family of four, are you getting $40,000 or more worth of services from the federal government?

Government spending is making the average American poorer.

It is a major reason for high unemployment and for a weak economy.

The government is misallocating $3.8 trillion a year.

Some of this spending is destructive. Some of it is just wasted. Some of it may be useful to some people, but the majority of people are seeing little if any benefit from the programs they are paying into.

Only in a free market — wherein each individual and family is allowed to keep his or her money and use it as seen fit — will consumer demands be met at their fullest.

When resources are used through non-voluntary methods (which is all government spending), these resources are not being used efficiently or put to their best use.

This makes us poorer. It makes our economy weaker. It makes our standard of living lower than it would be otherwise.

As long as the government continues to spend massive amounts of money, don’t expect a vibrant economy.

Technology will likely continue to get better, and we may still see some progress in other areas. But do not expect substantial and sustained economic growth until government spending is cut significantly.

In the meantime, you should plan on an economy that looks nothing like 1950s America. Most Americans will struggle just to meet basic expenses such as food, shelter, and medical care.

Your primary concerns in life should be maintaining your health and maintaining your income.

In terms of investments, your first rule should be to protect what you have. It is always nice to have an investment portfolio that grows, but your number one goal should be defense. This would include protecting your assets from inflation, which means limiting your dollar-denominated assets such as cash and bonds. It also means limiting your percentages in speculative investments to avoid any major losses.

If and when we do see a significant reduction in overall government spending, then we can shift out of a defensive mode…

With today’s technology and a freed up market, we will see economic progress that is unimaginable right now. But we first need to see a collapse of the welfare state.

Until next time,

Geoffrey Pike for Wealth Daily