My boss shared with me the following excerpt from the First Trust Monday Morning Outlook economic newsletter:
[The economy] is clearly underperforming. The question is: Why? And what should be done about it?
Some say that economies always perform poorly after a financial crisis. But, the banking crisis of the 1980s (Latin and South American defaults and the Savings and Loan Crisis) did not lead to economic underperformance. Others say that the US government must spend even more, but deficits are already so high that this seems spectacularly foolish.
The answer can be found in one of our favorite parables about economic growth. We borrow it from Paul Zane Pilzer.
Imagine 10 people live on an island. Each person catches two fish every day, which is subsistence living. There are no savings. Children, or immigrants who do not know how to fish, would be hard to absorb. The people would be desperate to increase production.
But then, a miracle happens. Two of these people figure out how to make a boat and a net. They fish 200 yards offshore. The two of them catch 20 fish each day with this new technology, which replicates the daily GDP created by all 10 using the old technology.
At this point, eight people no longer need to fish and the island has a choice. The eight could grow corn, pick coconuts, fix the boat and the net, or trade some other good or service to their more productive neighbors. Living standards would rise. Abundance and plenty would be created. Children and immigrants could be absorbed.
Or…the eight without a boat could become envious and complain that a 10 fish-to-2 fish income ratio is unfair and that the rich fishermen should pay taxes. So, the island votes to institute an 80% tax on anyone that uses a net.
Let’s assume that the fishermen with a boat continue to catch 20 fish a day. If so, the other eight would stop fishing and divide up the 16-fish tax between them. Everyone would still get two fish a day. Living standards would not rise. Kids and immigrants who did not know how to fish would be a burden. The benefits of the new technology would go to waste.
This is the problem with attempts by the government to be fair and socially just. This is also the problem with trying to spend our way out of economic pain. It doesn’t work.
And even if we decide not to tax the fishermen, but instead borrow the fish and give them away, the same thing happens. Borrowing the fish, and then consuming them, does not create new wealth. It only puts a burden on the less productive that they will never be able to repay. This is what has happened in Greece and many other European countries. Government spending, whether paid for with debt or with taxes, undermines job growth and wealth creation.
I love this example because it shows how capitalism (and selfishness) works and how government meddling in the economy (and altruism) doesn't. I also love the fact that it puts the proper blame for the poor economy on the government and not "children or immigrants."
Many Americans have said it's time for politicians to stop playing the blame game and just fix the economy, but I say, let's put the blame where it properly lies, with the government! Let's blame the government, hold them accountable and demand that they implement capitalism!