How Does the Government Kill the Economy?

Maybe the question should by "why does the government kill the economy."  I guess the answer to that one is that our government is either run by idiots or by folks that don't care about the economy.  I believe that too many politicians would do things that hurt the economy if they could be blamed on the other party.  If that isn't the case, then maybe we should get these folks some training in macroeconomics.

In any case, I would like to discuss how the government can have a very negative effect on the economy.  Firstly, I would like to talk about excessive taxation.  Many of us remember when Ronald Reagan talked about supply-side economics.  Supply-side economists believe that eliminating impediments to production in the market will support economic growth.  An economist named Arthur Laffer has had his name attached to a theory that states, in essence, that there is an optimum level of taxation.  More specifically, raising tax rates will only raise revenue up to a point.  If the tax rates are set too high, people and businesses will see a disincentive to earning more profits and the economy will slow down.  Therefore, if tax rates are raised beyond the optimum level, the revenues will actually be lower.  "Supply-siders" believe that taxation is a huge impediment to economic growth.

Of course, there are a lot of other impediments to growth, most of which ultimately raises the cost of producing a good or service.  The law of supply says that raising the cost of production reduces the amount that will be produced.  If you look at corporate taxes, there is a more common sense way of understanding their effect.

• When capital is invested in a business, the investors expect to get a return on their investment that is commensurate with the level of risk they are taking.  Taxes reduce the return on investment, thus making some borderline investments losers.
• If businesses really pass the taxes on to their customers in the form of higher prices, then that causes inflation.  The higher prices reduce the demand, so there won't be as many machines or workers employed in producing the products.
• If taxes raise the cost of domestically produced goods relative to imports, the trade deficit will grow and unemployment will grow.
• If consumers pay more in taxes, they will have less money to spend in the economy.  This is true whether the consumer is rich, middle class, or poor.

Besides taxes, our government loves to pass rules and regulations that raise costs of businesses.  This is true of doctors that must fill out mountains of paperwork to justify the care they have provided to their patients.  It is also true of businesses that must install burners to burn off paint fumes from the paint booth exhaust fan or study mountains of regulations to insure that they are providing medical insurance that complies with the PPACA.  In many metropolitan areas, special gasoline formulas are required by the EPA in the summer months, and that requires refineries to shut down and change the production process twice a year.  The government tells auto companies how much gas mileage their cars should get, or they set minimum standards for performance in crashes.

Now the government is stopping a privately funded pipeline that is to be built on private land from Canada to the Gulf Coast.  That is limiting the supply of oil from our neighbor, Canada.  If the pipeline isn't built, the oil will be transported by rail car across the same areas at higher cost.  Why?  Because our government wants the cost of fossil fuels to rise, reducing demand.  Of course, the demand has been reduced over the past five years, because of the higher energy costs.  Today, fewer people are driving to work.  Also, fewer manufacturing facilities are located in the U.S. and using energy.  Does the EPA really think that this will clean up our planet?  Will the new factories in China or Mexico have low emissions like the U.S. plants?  Do you remember the views of Beijing from the summer Olympics a few years ago?  How clean did that air look?

The big problem with the MessAPolitico is that everything they do hurts the economy and, ultimately, all of us that participate in it.  We all participate in the economy as workers, consumers, and often as investors.  The economy is damaged and the political goal is never even reached.  Generally, the problem to be solved by government intervention only gets worse.  Then the MessAPolitico loves that, because they can blame the other side for making things worse and run for re-election on a new, undefined fix.  What's the fix?  It's another MessAPolitico that makes things just a little bit worse again.