The Necessity of Risk for Economic Growth

Everyone wants a growing economy. A growing economy means job creation, low unemployment, higher wages, and more available credit. Alternately, in a contracting economy (recession), jobs are cut, buying power is reduced, and credit lines tighten. How do you create a growing economy? Reagan understood how: turn the economic producers loose by taxing them less. This approach only makes sense when you define wealth correctly.

There are two ways that wealth is viewed in America. Wealth is seen as either a dynamic representation of innovation, labor, and production; or it is seen as a static entity to be spent. The problem with the discussion of wealth in our political scene today is that both sides use the same words to represent two very different concepts.

Wealth is a dynamic representation of innovation and labor. Wealth is created through "the creative destruction" (Joseph Schumpeter) of our free market. Innovators and entrepreneurs risk failure and ruin to bring new products and services to the consumer. They are occasionally rewarded for the risks they take. They are often punished by the market for unsuccessful products.

Wealth is also a static asset. Money in the bank is a static figure. It represents the buying power of a person in the market. The more productive people are rewarded with more buying power. This is a necessary and healthy intermediate step along the way to more wealth creation.

Now we come to the problem facing the politicians that we have elected. The government does not create. It does not innovate. Government exists as a necessary burden on the market. The proper role of government is a bit too broad for this post. Suffice to say that government provides some level of services useful to the general population.

Politicians provide those services through taxation. Taxation taps into the static half of the wealth definition. Politicians have struggled for years to find the right level of taxation to provide the services requested by we, the people.

Some of our current politicians seem to confuse the necessary burden of the government with an economic growth engine. The problem with this confusion is that when you increase taxes in order to provide more "government jobs", you take money out of the economic engine. The less money available for innovation, the less economic growth. "Whatever you tax you get less of. Whatever you subsidize you get more of." (Alan Greenspan)

A liberal politician wrote: "Theoretically, there is nothing that can stop the government from taxing 100% of income so long as the people get benefits from the government commensurate with their income which is taxed." This politician just happens to be Barack Obama's father, a Kenyan politician.

Let's examine his logic with a simple example. I am a network administrator for a chemical manufacturor. I provide a service to my company that helps them be more competitive in the marketplace, therefore producing more goods and acquiring more buying power. I get paid well for my services. I gross roughly $40,000 a year. Now, if we take the idea of 100% tax for commensurate benefits, then at the end of a year I will pay 40k in taxes. In return, I might get subsidized housing, free healthcare, etc. What I get doesn't even matter. How efficient the government is at providing these benefits.

Here's why: Lets say my company goes under. I lose my job. Now I gross $0 a year. Does this affect what I get from the government? YES! Now I get unemployment as well. Basically I get more benefits from sitting at home, producing nothing, then I do from getting up at 5:45 every morning and driving in to work. Would I get another job? Perhaps. But not everyone will. And that is the crucial weakness of a 100% tax. It rewards failure, not production.

This post has been a bit rambling, but I hope I raised some interesting points. Let me know what you think. Please post a comment.