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The Reason for America’s Economic Decline

by

The New York Times is reporting that “the American middle class, long the most affluent in the world, has lost that distinction…. After-tax middle-class incomes in Canada — substantially behind in 2000 — now appear to be higher than in the United States. The poor in much of Europe earn more than poor Americans.”

Statists would argue that the reason for this phenomenon is that Europe embraces statism to a much larger degree than the United States. If Americans want to increase the standard of living of the poor and middle class, statists would argue, they need to increase the size of Americas welfare-warfare state.  Of course, statists have a difficult time explaining why Greece is mired in economic difficulties, given its longtime, enthusiastic embrace of statist economic policies.

Not surprisingly, libertarians have a different explanation for America’s economic decline. That explanation lies in the massive amount of wealth that has been — and continues to be — sucked out of the pockets of the American people to fund not only a gigantic welfare state apparatus but also a gigantic warfare-state apparatus.

Statists argue that the reason that the middle class and poor are worse off is that the rich are richer. Their solution is: tax the rich and distribute the money to the poor and middle class. If the government does that, statists argue, the middle class and poor will obviously be better off because they will have more money at their disposal.

That, of course, is the foundational principle of the entire welfare state, the way of life that Americans have now lived under for some 100 years. If a welfare state is a key to raising the standard of living of the middle class and poor, you would think that the middle class and poor would be celebrating their ever-increasing standard of living. Such is clearly not the case.

The welfare-warfare state is actually an attack on the private wealth and income that is necessary for an ever-rising standard of living, especially for the middle class and poor.

Here’s how the process works. Let’s say, hypothetically, that every middle class adult in America is earning $40,000 a year. Let’s assume that there is no welfare-warfare state apparatus and, therefore, that there is no taxation on income (or IRS). That means that everyone is free to keep everything he earns and to decide what to do with it.

Let’s assume that everyone saves $10,000 out of his $40,000 income. Everyone puts his $10,000 into the bank. The banks lend all those savings to companies, which use the money to invest in better tools and equipment. Those tools and equipment make workers more productive. More productivity means higher profits for the firms. Higher profits lead to higher wages.

That’s one of the keys to a rising standard of living — capital, which comes about through savings all across society. That’s why the standard of living of the American people was soaring during most of the 19th century, especially compared to Europe and Asia. For the first time in history, people were free to keep everything they earned. People saved, and those savings went into productive capital, which led to ever-rising standards of living. Penniless immigrants were fleeing Europe and Asia to come to the land of no welfare, warfare, and income taxation. The standard of living of most of them was rising, and many of poor were actually becoming rich.

The problem arose when the statists saw all that wealth coming into existence. They were beside themselves. Here was a massive amount of income and wealth that could be confiscated and distributed to others. The statists simply could not countenance the fact that some people were richer than others, even if everyone, including the poor and middle class, was better off than he would be otherwise.

It boggles the mind to think about what life in the United States would be like today if the process of wealth creation and rising standards of living had not been interrupted by the federal income tax and the federal welfare-warfare state. Today, the poor and middle class would be experiencing an unimaginably high standard of living.

In order to fund the welfare-warfare state, the government, through the income tax and IRS, seizes the $10,000 that people would have put into savings. Thus, those savings never get put into the bank, which means that they’re not available for companies to borrow, which means that better tools and equipment don’t come into existence, which means that firms don’t become more productive, which means that real wage rates don’t rise.

Of course, income taxation is not the only way that the government seizes income and wealth. U.S. officials also do that through monetary debasement — i.e., inflation. That’s what the Federal Reserve is for — it enables the government to seize wealth and income surreptitiously by simply printing much of the money that is used to fund the welfare-warfare state apparatus.

So, the two biggest engines of wealth destruction are the income tax and the Federal Reserve. If Americans want a society in which the poor, middle class, and wealthy are all experiencing ever-increasing standards of living, Americans need to eliminate these two engines of wealth destruction. That also necessarily means the dismantling of the entire welfare-warfare state apparatus that the income tax and Federal Reserve fund, an apparatus that itself is a direct assault on the freedom, security, and economic well-being of the American people.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.