Newspaper article The Washington Times (Washington, DC)
Byline: Richard W. Rahn, SPECIAL TO THE WASHINGTON TIMES
How is it possible that the government can spend almost twice as much as it takes in without having high inflation? The fact is that over a long period of time, it can't. In the short run, which can be a few years, the government can paper over its fiscal irresponsibility by expropriating most of the productivity gains in the private sector through regulatory and central bank actions. This is precisely what has been happening in the United States.
The reason real, after-tax, per capita incomes have been able to increase year by year for most Americans for the past two centuries is that productivity has been growing - that is, the amount of goods each worker produces per hour has risen steadily. The reason productivity rises is that workers tend to be better trained, the amount of productive capital per worker rises, and there is a steady flow of innovation, which reduces costs and improves goods and services.
To understand productivity growth, look at the advances of farm and construction machinery - which enable one worker to do more, better and with greater safety. Wal-Mart, Amazon and FedEx have made amazing developments in reducing distribution costs by instituting better equipment and systems. Magnify these individual company and industry gains throughout the economy, and the result is a steady national gain in worker productivity.
Over the past few decades, worker productivity growth has averaged more than 2 percent. Most of this gain eventually ends up in worker paychecks, with some being siphoned off to support people who are not working and pay for various government schemes. Even so, for the quarter-century preceding 2007, after-tax, real (inflation-adjusted) per capita, disposable income grew at about 2 percent per year.
Since 2007, worker productivity growth has slowed, in part because of the lack of new investment. The big change has been that real, per capita, disposable income has slowed sharply since the end of the recession, being less than 1 percent per year, which has yet to make up for the 3.64 percent loss in 2009. By contrast, in the three years after the end of the Reagan recession in 1982, real, per capita, disposable income grew by almost 4 percent per year.
The recent gains in productivity growth have been taxed away by government. The increases in taxes are all non-legislated taxes, largely invisible to most people. First, there is the inflation tax imposed by the Federal Reserve, which currently taxes away about 2 percent of the purchasing power of the individual's money each year. There is nothing new in this tax; the Fed has been in the business of creating inflation since it was formed in 1914.
What is new is the big tax on savings, again imposed by the Fed. …