But a few questions are never asked, for example: if these bailouts are so important to our prosperity, then why do they have to forcibly tax us to pay for the bailouts? Why dont they take charitable donations for this purpose? The answer is that nobody would willingly give their money to bailout failing businesses.
The fact is that history, experience and common sense guide us in a different direction. The politician’s argument go further to say that the government should intervene to keep credit flowing, keep people spending (rather than saving), and create government jobs to keep the economy afloat. These are the great falsehoods of our time.
In a free economy, the basic incentive to efficiently accumulate wealth through value creation. This essay will show how these incentives create a cycle which guides people to their most efficient role in society.
This cycle is the real life-blood of the economy. People who engage in value creation activity, build up assets - those assets are then siphoned off (through taxes and inflation) to pay for those whose activity is a liability, such as prisoners, welfare recipients (corporate, international and individual), most government employees, and others.
What is Value Creation?
As people exchange goods and services for other goods and services of greater value, competition to create value drives prices down, quality up. Newer, better goods and services result over time. People also begin to store or invest part of the value they create. This is the process of wealth accumulation. By accumulating wealth, one can continually benefit from the investments in value creation over time. The constant incentive to create value and accumulate wealth drives the society into a state of affluence.
Job losses occur when the employee or business is no longer creating value. Employees and businesses that create value stay, those that cost value are moved to more efficient roles. This is not always the business or employee’s fault, for example, a new technology could simply make the job obsolete, a contractual obligation could hamper value creation, competitors might find better ways to create value and take market share, or the company might not be using the employee efficiently. But the principle remains the same - existence in the market is dependant on merit - and merit is based on value creation.
When a person is laid off or a business goes under, they then search for a new way to make money. To do this, they must figure out how they can create value for others through some exchange. When they find their new job, they move from a value destroying role, to a value creating role - they transition to a more efficient job.
Often, governments will try to intervene to stop the job loss process. By doing so, inefficient jobs remain – meaning that employees stay in the market who are costing more value than they are creating. Nancy Pelosi has said we should bail out a failing newspaper (ironically one which has long supported her career). Clearly this newspaper is not creating value for consumers and advertisers or it would not be in financial trouble. Consumers clearly feel their money is more valuable than the newspaper. Protecting inefficient producers can destroy the value creation process which makes an economy function well.
Credit vs. Savings
Credit is a way of spending future earnings. By brokering the transaction today, the creditor can make money by charging interest. Certainly, there is a value creation element to credit – the money today is more valuable than it is when the payments come due. Well invested borrowed money can earn returns for the debtor and pay back interest for the creditor.
However, credit that goes toward spending or malinvestment puts a liability on future value creation. A piece or maybe all of future earnings must go to pay for money already spent. This process reduces accumulation. This principle remains true whether we are discussing a person, business, municipality or country (including the U.S.).
The U.S. government is so indebted that it cannot help but heavily burden future value creation. Adding more debt and more spending can do nothing but hamper future value creation and wealth accumulation. However, the U.S. government has a tool that no other institution has in the U.S., which is inflation.