Successful economies provide opportunities, growth, and economic wellbeing for the citizens of a country. It is important to understand the root causes of why some economies are successful while others are not, and in the worst cases, abysmal failures where the citizens live in poverty.
After decades of watching economies succeed and fail, one lesson is clear. Incentives, the most powerful force on earth, drive behavior. People respond to what they are rewarded for, and when incentives are aligned with the right goals, societies prosper.
Most people want to build better lives for themselves and their families. They will work hard when they can keep the fruits of their labor and profit by providing goods and services that others value. Businesses that fail to serve customers do not survive, and that discipline is what keeps the economy innovative and strong.
This only works in a free enterprise, market economy, or capitalism, where people can own property, keep what they earn, and operate under fair laws which protect them and others. In that system, government serves the people, not the other way around, and individuals are free to work, invest, innovate, and create value.
In recent years we have suffered from high inflation, rising interest rates, soaring home prices, and slower growth. To understand how to reverse these trends, it helps to remember that an economy has two parts. The private sector produces goods and services. The public sector governs and enforces the law but does not create wealth. Our Constitution purposefully limited the role of the federal government for this reason.
When government is smaller, the private sector is larger, and the economy grows faster. With less interference and fewer regulations from government, businesses can produce more quickly and more efficiently. And when taxes are reasonable and budgets are close to balanced, government does not have to borrow heavily and compete with the private sector for capital. That is how we create growth without the inflation and financial strain we are experiencing today.
So let’s put these ideas into a simple formula for good governing and prosperity with low inflation which also results in lower interest rates:
Limited government plus a balanced budget plus reduced regulations equals growth and prosperity with low inflation and interest rates.
Bigger government, big fiscal deficits, and vast regulations all work against a growing and prosperous economy. This is not magic. It is basic economics and common sense.
We are doing better than most, but nowhere close to potential, if we had better economic policy. If you look at economies that follow capitalism but have bad policies, you will quickly see the difference. A quick look at the United Kingdom and France will tell us all we need to know about bad policy. In those two countries, the government takes up about one half of the economy. They have high taxes, higher expenditures, and large deficits. They are highly overregulated. It is difficult to raise taxes because they are already so high or cut expenses. They are struggling to get any growth and must borrow to cover the deficits. And they are quickly running out of ‘fiscal space’, the ability to keep borrowing. They have very serious problems in their economy leading to political instability, because no one has a solution to their problems the citizens will accept.
We are headed in that direction but have not reached their level of government and taxes - yet. But the trends are unmistakable. Washington spends more than it receives year after year, then borrows the difference, crowding out private investment and pushing interest rates higher than they would otherwise be. At the same time, layer upon layer of new regulations make it harder for small businesses to start, to expand, and even to survive. These are the very businesses that create most new jobs and innovation in America.
We must recognize the issues, and start moving toward less government, less taxes, reduced deficits, and less unnecessary regulations if we want to grow faster with more prosperity for all. It isn’t easy, but we citizens must understand these dynamics and some basic economics, and demand our politicians fix the mess they created, for the sake of our kids and grandkids and all future generations.
