Who Will Pay?

Column 2018-2 (10/22/18)

Our world is filled with conflicts. In the realm of politics and government these conflicts run rampant. Most of these conflicts are fueled by emotions rather than facts and reason.

One of the core conflicts is, Who should own the wealth? Before considering this conflict we need a common understanding of what wealth is.

Everything of value is part of our wealth. Contrary to a popular belief there is no such thing as inherent value. Individuals value certain things because of the belief that those things will some how contribute to the individual’s satisfaction.

Individuals seek to increase their satisfaction. Anything that an individual believes will increase his satisfaction has value to him. Anything that can be used to produce or preserve those valuable things also has value. Thus, consumer goods and the production goods that can produce consumer goods are all part of our wealth.

Most people can’t afford to own the production goods needed to produce the consumer goods they want. They depend on production goods provided and owned by others.

The only way to increase our standard of living is to make better production goods that in turn make workers more productive. Someone has to pay for developing and providing these better production goods. Even if we don’t develop better production goods, someone has to pay to replace the old ones when they ware out.

Not all invested wealth belongs to the rich. Much of it does. Diverting wealth from investment to consumption spending depletes the investment in production goods which is indispensable to prosperity. It is the equivalent of eating the seed corn.

It is possible to tax away investment for several years without obvious consequences. Sooner or later productivity and prosperity will start to slip away. It may not matter who owns the investment in production goods. It is vital that some postpone consumption and invest in production goods.

Taxing the rich investors isn’t painless for everyone else. When investment decreases, the poor and middle class will feel the pain from decreased productivity long before the rich do.

Those who have the least are hurt the most when productivity declines. Most rich people could still live very well if their incomes were cut in half. What would happen to the poor and middle income people if they lost half of their income?

There is another way to pay for excessive government spending, for a while. To some extent the US government is already using it. Governments have unlimited capacity to create new money. They don’t even have to print it. Just punch a few keys on the computer.

There is one small problem. Government has zero ability for avoiding the consequences from creating new money. The new money gets its value by sucking it from the existing money. The price of everything goes up. Create enough new money and all the money becomes worthless. This is nothing more than an indirect way of diverting wealth from investment to consumption spending.

Zimbabwe performed that magic a few years ago. Venezuela is doing its best to join the club. A recent article reported that price inflation in Venezuela is rolling along at about 48,000 percent per year. Suppose that report is wrong and the inflation rate is only 24,000 percent. Would it make any real difference?

So far the government's solution is to issue new Bolivar bills with five fewer zeros. A million old Bolivars become 10 new ones. This will not do a thing to solve the underlying problem of overspending by government. And, yes, it can happen here.

The people who call themselves socialists want the US government to provide trillions of dollars worth of more “free” stuff. Paying with taxes on businesses and the rich will be a disaster. Paying with new money will likely turn out even worse. Will anyone scream STOP?

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Copyright 2018

Albert D. McCallum