Wealth is produced by the free exchange of goods, where both parties benefit. A person who lives entirely on their own, engaging in no commerce with others, produces no wealth. This is not to say such a person couldn’t survive, or be happy, but they will only accumulate the value of their own labor. A hermit who isn’t very good at wood working, but hunts with great skill, can generate wealth by trading venison for a fine new rocking chair, made by a starving carpenter. Both parties benefit from this voluntary exchange.
Every aspect of our modern economy evolved as a way to magnify the surplus value created by such commerce. Currency is easier to carry than bartered goods. Credit allows essential purchases and investments to be made with future earnings. The purchase of stock allows investors to pool their resources and finance the risks taken by visionaries, with the anticipation of reward.
All of these tools allow people to take advantage of predicted opportunities. They don’t have to wait until they see a mob of hungry customers, and pull out a wad of cash to finance construction, in order to build a restaurant. The highest level of wealth is generated by transactions that essentially take place in the future.
This is the level of wealth Americans are accustomed to. You operated on that level when you used your credit card to purchase cutting-edge electronics or software on Cyber Monday. The Information Age economy is a rolling thunderstorm of investments and purchases, moving billions of dollars with the speed of light. Dollars accumulate an electric charge of wealth as they pass between producers and consumers, employers and employees, investors and entrepreneurs.
This financial supercomputer requires a calm, controlled environment to function properly. It processes vast amounts of data, which must be reliable. That is why economies contract under the influence of activist government. The State is unstable and unpredictable. It can insulate some entities from consequence, and penalize others out of ideology. Its power can surge by exploiting class-warfare resentment, or deflate when key politicians become mired in personal scandal. The government can enter a market as a “competitor,” rewrite the rules to suit itself, and cover its losses with money from deficit spending or increased taxes. Its income and expenditures are not tied to its performance.
High taxes are inherently destabilizing. Look at the current situation with the Bush tax cuts. Political games are being played over holding some tax rates stable, while allowing others to skyrocket, based entirely on an arbitrary line of income. Politicians talk loudly about the need to create jobs, while promoting job-killing tax increases in the name of “fairness.” Which one do they really mean?
Another cause of instability is the schizophrenic nature of Big Government, which loses sight of its mission in pursuit of its goals. Case in point: the Federal Reserve. Prior to 1977, the Fed was charged with maintaining the stability of the currency. In that year, Congress changed it to a “dual mandate” and assigned them to also “promote effectively the goal of maximum employment.” How can the Federal Reserve do that? Hint: they’ve got a printing press that spits out dollar bills in the basement.
Reducing the value of our currency is meant to increase exports, and encourage investment in corporate bonds. It also increases the unpredictability of government behavior, and corrupts the data stream feeding into the engine of commerce. The Federal Reserve is transformed from a group of financial engineers into architects, with a mandate to reshape broad sectors of society. As George Will relates in a recent column, Federal Reserve governors use scary words like “social welfare” now.
Fox Business analyst Peter Barnes reports Representative Mike Pence (R-IN) has introduced legislation to end the “dual mandate” and prevent the Fed from making potentially harmful moves in the name of economic stimulus and job creation, forcing them to focus on protecting the dollar and preventing inflation. The measure has support in the Senate from Bob Corker (R-TN).
Also supporting the move is the president of the Federal Reserve Bank of St. Louis, James Bullard, who says, “no matter where you are in the world, the only thing that your central bank can do is control inflation in the long run. All the things on the real economy are due to real factors – technology and preferences in the economy. I thought we had clarity on that. I thought the rhetoric that we’ve used for at least 20 years is that we’re going to provide a stable price backdrop and let the private sector decide how to allocate resources.”
Mr. Bullard has it exactly right. Wealth and prosperity require stability, and resources allocated through free choice. Every other system provides mere subsistence, or less.