Market Analysis

Government Chicken or Private-Sector Egg?

There seems to be much confusion surrounding the origin of economic activity. But it seems pretty clear, to me.

I’ve noticed an interesting pattern lately: Many seem to believe the question of whether economic activity originates primarily in the private or the public sector the equivalent of a chicken-and-egg question. Or at least as a question very much open for debate. As evidence, consider the widespread bemoaning of global—particularly, but certainly not limited to, European—austerity measures. Folks suffering under that concern broadly concede government budget deficits and debts are currently too high but simultaneously fear cutting public spending now will practically negate the chances for economic recovery (beliefs fraught with their own misperceptions, in my view, but they’re for another column). In other words, sans government spending, the private sector won’t resume (or, more correctly, continue) growing.

Then there’s President Obama’s recent gaffe moment of honesty when he proclaimed business owners didn’t build all the inputs necessary to generate their output. To an extent, he’s absolutely right—“other people,” ostensibly, the government, built the infrastructure that is prerequisite to any private entity’s economic production. From this perspective, the relationship is rather one way: Without the government, the private sector likely wouldn’t function well.

You can even see it in debates about what to “do” about unemployment—the underlying logic being the government must take some steps to spur increased private-sector hiring. These folks presume the private sector is currently unwilling to hire, so if the government doesn’t step in, who will?

In fact, the more you think about it, the more you realize the sheer ubiquity of the notion government involvement is a necessary prerequisite for private-sector [fill-in-the-blank—growth, hiring, spending, etc.].

But as far as I’m concerned, the causality is almost entirely backwards, and the issue anything but a chicken-and-egg problem. Nor do folks who think the government must exist first for the private sector to follow have it quite right. Because the reality is the private sector is far and away the originator of economic activity, and that’s always been the case.

After all, governments can’t even exist if there isn’t money for them to exist (something the Founders learned early under the Articles of Confederation). And where does that funding come from? From tax payers. Full stop. End of story. There’s no other possible source of funds because the government doesn’t engage in any self-sustaining economic activity to speak of.

Now, to be sure, the government uses those funds for many productive purposes, including building infrastructure—roads, bridges, highways, tunnels, etc. And that infrastructure allows the efficient conduct of commerce—but it never would’ve been built in the first place if citizens hadn’t long ago realized they needed to coordinate somehow to ease communication and transportation. (After all, people did travel from the eastern seaboard to California long before I-70 made much of it a relatively quick trip.) And so they formed governments, which they agreed to jointly fund through taxes so that public goods—those that typically present little profit-making potential but are universally beneficial—could be built and maintained. (Of course, that’s just one of myriad reasons governments are beneficial, but from an economic perspective, which is my main focus here, I’d argue it’s the reason of primacy, maybe along with ensuring a relatively level playing field from a regulatory standpoint.)

So if the private sector is the prime mover and shaker and the government a useful, but secondary, aid in terms of economic activity, the aforementioned issues can be seen in a slightly different light. Take austerity. Since the private sector originates most all activity (including government activity), cuts in government spending ostensibly leave more dollars in the private sector’s hands. Meaning private businesses have more capital to invest in ventures whose aim is earning a profit, which benefits everyone in the long run—government included—because it means they can hire folks to continue their (presumably, growing) business, buy goods from other firms and yes, pay taxes.

Or unemployment. So many bemoan the dearth of private-sector hiring and want the government to “do something.” But short of decreasing regulatory burdens and ensuring businesses have sufficient capital to continue growing (so they can then, that’s right, hire people) or outright hiring more Marines, there’s not really much the government can do.

So at the end of the day, much as folks would like to believe the government has an infinite ability to create economic activity and fear shrinking government would create a vicious cycle we’d never recover from, the reality is far simpler than that. The private sector is both the chicken and the egg. In fact, it’s quite possibly the goose that laid the golden egg. And the solution to so many of today’s perceived woes is to curtail government involvement where possible and let the private sector do what it does better than any other entity: create economic activity and hence, prosperity for all.

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