Worst Economy Since 1946

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The GDP fell 2.4%, the worst yearly drop since 1946, and the first yearly drop since 1991. The last time the economy didn’t grow during the year was so long ago thta kids entering college this year haven’t seen it in their lifetimes.

Now, this quarter we’re expected to see a little bit of an uptake in the GDP. Forecasters are saying this is due to inventory resupply. After this quarter, however, there is going to be another massive dip in economic activity. We are on the edge of a double-dip recession. We may see a new depression, something most people alive today have never seen.

What is causing this?

It’s really quite simple, if you understand what wealth is and where wealth comes from. Socialists like Barack Obama are only interested in where wealth ends up, without understanding what created it in the first place, nor understanding what it really is.

Wealth is an accumulation of value. Everyone has a different value for everything. This depends on a large number of factors, but ultimately, only individuals can determine what they really want. We are fooling ourselves if we think we understand what our neighbors want and value. Only we know what we really want.

The same thing has different value to different people. This is another lesson socialists don’t understand. If I don’t need a car, and you give me a a  car, you’re wasting that car! Instead, let people find someone who really wants what they have and exchange it for something they really want. That is, create markets, and people will create wealth on their own.

Every free trade interaction creates wealth! See, if I go into Safeway, hand over a dollar and buy a doughnut, both Safeway and I walk away with more wealth than we started with. I like money, but I’d rather have a doughnut than a dollar. Safeway likes doughnuts, but they’d rather have the dollar than the doughnut. Both people get what they want, which was more than what they had before.

Even the opportunity to trade is valuable! That’s because the stuff I have becomes more valuable to myself simply because I can use it. Drop me off in Seoul, Korea, and suddenly, dollar bills aren’t so useful for me. I’ll gladly exchange them for Korean won. Drop me off in Federal Way, Washington, and I’ll trade those won right back for dollars.

Armed with just the information above, the way to wealth is clear: Create, protect, and exploit opportunities to trade, and the people will create wealth on their own.

If this is too abstract for you, let’s consider what government taxes, borrowing, spending, regulation, and uncertainty do to an economy.

Taxes increase the price of everything. This is because if you want to do something, you have to pay taxes above and beyond what you’d normally pay. If I want to work for a company, they have to pay me more money than they’d have to pay if there were no taxes. If I want to buy a dougnut, I have to pay more than I’d otherwise pay due to taxes. If taxes go high enough, certain kinds of trade opportunities disappear altogether. The damage to wealth due to taxes is much greater than the value of taxes collected. Taxes hurt a lot more than they can ever help.

Borrowing decreases the amount of money available for lending. Let’s imagine you want to buy a house. You need to borrow money. However, searching high and low, near and far, you can’t find any bank willing to loan money to you. “Sorry, bud,” they all say. “See. we’ll make 5% off of you, but Uncle Sam is paying us 7%, and we’ve already loaned all our money to him.” When governments borrow money, the money that otherwise could be loaned out to individuals disappears. Government borrowing destroys wealth just like taxes do.

Government spending redirects economic activity to less efficient activity. The reasoning is simple. If people discovered that doing XYZ is profitable, they would do it, barring any other more profitable scheme. When government tilts the marketplace by paying people to do XYZ, which they otherwise wouldn’t do, then that means the other, more profitable things remain undone. Government spending destroys wealth just like taxes do.

Government regulation reduces opportunity. This is because government issues edicts making it illegal to do things that people might otherwise do. If people weren’t doing it in the first place, there is no sense for a regulation to limit the behavior. Government regulation destroys wealth just like taxes do.

Government uncertainty increases risks. See, if you knew what the government would be doing 10, 20, 50, and 100 years from now, you can plan accordingly. If you can’t tell what the government will do next year, you have to hold off until you find out. It’s really simple. If you were a child and you weren’t sure whether your family was going to go to the county fair, you wouldn’t know whether to save your money for the fair or to spend it right now. If you knew ahead of time, you could plan accordingly. Uncertainty means you can’t make good plans.

If President Obama wanted to help, he would do the following:

  1. Dramatically cut taxes.
  2. Eliminate government borrowing.
  3. Dramatically cut spending to match tax revenue.
  4. Eliminate the vast majority of economic regulations.
  5. Eliminate uncertainty by encouraging constitutional amendments that keep taxes low, the government from borrowing, and the government from regulating the economy.

As it is, he is doing completely the opposite.

  1. Proposing dramatic tax increases.
  2. Dramatically increasing government borrowing, to the point of near-bankruptcy.
  3. Dramatically increasing spending.
  4. Dramatically increasing the scope of regulation, and “cracking down” on those who might be violating them.
  5. Increasing uncertainty by proposing one socialist policy after another, and vowing to resurrect them after they have been killed.

Economics ultimately boils down to one question:

Who is best at meeting a person’s needs?

Socialism fails because its answer is always, “A centralized government with tyrannical powers.”

The United States has won because it has chosen, largely, “The person himself.”

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