For the average person not schooled in economics, there is little understanding of the importance of the basics. Many of the proposals we hear today amount to killing the goose that laid the golden eggs. Too many people and leaders simply fail to understand the implications of what they propose. They seem clueless about how America became a rich and prosperous country in the first place.
For most of human history, economic systems offered limited hope for people to improve their lives. Society was ruled by autocrats, dictators, kings, or brute force. Those in power dictated the rules and generally prospered by taking from others. The only law was what the rulers themselves dictated. Most people existed to serve those in power, with no incentive or opportunity to grow, create, or prosper on their own.
Then came a remarkable shift in human history. The Industrial Revolution arrived, accompanied by the ideas of John Locke, Montesquieu, Adam Smith, and others. Democracy, modern technology, civil law, and free market principles began to take root. For perhaps the first time on a broad scale, societies discovered that prosperity no longer depended on taking wealth from someone else. Wealth could be created. More people could prosper together.
Good economic policy led to growth and prosperity for the masses. Poverty declined remarkably during this period. The expansion of freedom, property ownership and a market economy produced the highest standard of living humanity has ever seen. Individuals had incentives to work hard and create to improve their lot – prosperity for all was the result. Yet lately we seem to be moving away from the policies that created this prosperity, and we are paying the price.
The formula that made nations rich is no mystery. Economics is complex, but in the abstract, it can largely be understood as three principles of limited government, sound fiscal practices, and individual freedom.
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In a civilized society, government is essential. Its primary functions are to protect citizens and maintain a legal system that preserves law and order. The government also provides certain services for the common good. But nearly all the goods and services we use every day are produced by the private sector. The public sector must obtain resources from the private sector through taxation or borrowing to finance its operations.
As the government grows, it requires more resources, leaving fewer resources available for the private sector to invest in creating new and better products and services. By contrast, a smaller, limited government results in a larger and more dynamic private sector, fostering greater innovation, increased production, and broader economic opportunity. Keeping the government focused on its essential functions ultimately supports stronger economic growth and greater prosperity for everyone.
Sound fiscal practices are equally important. Government finances itself primarily through income and payroll taxes. The more the government takes from citizens, the less people have available to spend, save, or invest. If the government takes only what is necessary to pay its legitimate expenses, then individuals and businesses retain more resources for productive activity.
Balanced or near-balanced budgets help maximize economic growth and consumption by ensuring that resources remain available for productive private sector investment. When the government runs large deficits to finance extraordinary spending, it must either borrow heavily or print additional money. Heavy borrowing draws capital away from the private sector that could otherwise be used to build businesses, create jobs, and improve productivity, while excessive money creation can function as a form of hidden taxation through inflation. Over time, large deficits can reduce productivity while creating substantial debt burdens and rising interest costs that weigh on future growth.
Our republic was built on the understanding that rights belong to individuals and not governments. Laws exist to protect those rights, and reasonable rules and regulations exist to protect citizens from abuse and harm.
Problems arise when regulations become excessive or unnecessary. As regulatory systems expand beyond essential protections, they can restrict the freedom to act and impose additional costs that weigh on productivity and economic growth. Today, there are more than 175,000 pages of regulations generated by an expanding bureaucracy, with thousands of additional pages added each year. Many of these rules carry costs that reach into the billions of dollars and are often implemented by unelected agencies that receive limited public attention. Excessive regulation can ultimately impede productivity, increase costs, and place additional burdens on businesses and consumers alike.
Countries that follow these principles most closely consistently enjoy the highest standards of living. Countries that ignore them have repeatedly struggled with stagnation and poverty.
The United States grew rich following these principles. Economic growth accelerated, and poverty rates declined dramatically. Yet over the last century, we have gradually moved away from them. Growth has slowed. Large government has become routine. Large deficits have become routine, with debts accumulating at an alarming pace. If we continue down this road, we risk undermining the very foundation that made America prosperous in the first place.
Good economic policy is not complicated. The difficult part is finding discipline and the will to follow it.
Les Rubin is the Founder and President of Main Street Economics
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