A Public/Private Economy

In intro economics, many students (myself included) learned about Keynesian economics (named for John Maynard Keynes). That is, National Income (GDP) is made up three distinct contributaries: Consumption, Investment and Government spending. During times of feast, the government is to raise taxes and cut spending; during times of famine, the government is to spend its revenue, raised from taxes and increase spending to prop up the economy. In other words, it is up to the government, not the consumers or investors to pull an economy up out of a down cycle.

In order to see why this argument is not the best cure for a down cycle, we have to remember what government spending is. It is a sort of indirect consumption. That is, after a government taxes its constituents, it spends money on "public goods," which can be broadly defined from military and police to a more leftist version with employment programs, welfare and medicare for the elderly and poor. Government spending, for all its pomp and circumstance, is inefficient. Simply stated, the government is spending your money for you. For politicians and bureaucrats, it is more or less monopoly money. It is not earned, it is taken. Because it is not earned, it is not spent with the same frugality and wisdom as someone spending the money he or she earned according to the individual's preferences (private consumption). It is not government spending that props up an economy, it is private consumption. Cutting taxes and allowing consumers to spend their money is the best cure for a downcycle, not indirect consumption as some Keynesians may have you believe.

Nothing will top a free market when it comes to an economy. When people are allowed to exercise their consumption preferences, investors may follow the signals to invest in serving consumers (business investment). A private economy is the most efficient. When people are not allowed to follow their preferences and are forced to surrender a growing portion of their earnings to someone who will spend it less wisely, how does this rescue an economy? It is important to consider this when many politicians say that raising taxes and more spending are the only ways to fix our economy. The government's rightful place is protecting investment and consumption from fraud, not to participate actively in an economy. Such participation only ensures further inefficiency and a further drop in the economy.

I know this isn't the most thorough examination of this topic, but no one came here to read a book ;) If anyone would like a further examination, please let me know and we'll discuss some more.