Wealth Creation and Public Policy

One of the defining questions for thoughtful and morally serious human beings pertains to material prosperity: "How is wealth created?" How does a people lift itself out of poverty into widely enjoyed abundance? This question of not-mere-academic debate between American liberals and conservatives. Thus, we are asking how best to respond to this recession that is bordering on a depression. President Obama talks about the wealth creative capacity of the private sector, but he throws trillions of borrowed, government dollars into spending on just whatever Congressmen pull off their wish lists, as well as a some sensibly targeted investments in infrastructure, and the like.

Yesterday at The King's College, David Blankenhorn of the Institute for American Values hosted Cornell economist and New York Times contributor Robert H. Frank and Time magazine columnist Justin Fox in a discussion of the paradox of thrift. Prof. Frank defended the President's stimulus spending, saying that if we are going to borrow money in order to spend more to create demand for production, it makes more sense for the government to borrow at 3% than for private citizens to borrow at 22% on their credit cards--as though those were the only two alternatives. He also contrasted government spending on projects like bridges and tunnels that facilitate commerce and prevent death by bridge collapse which passes all sorts of costs on to the rest of us over against private spending on silly consumables. (He did mention comparable investments that individuals could make, but of course at a much higher rate of interest.)

The problem that some in attendance pointed out is that when given the go ahead to spend, government directs the spending largely in ways that are politically advantageous to officeholders, not economically advantageous to the country as a whole. Furthermore, once given the green light for a prudent burst of public spending, government just keeps going and going. A businessman in the audience suggested somehow arranging a 4% interest rate for mortgages so people could refinance their homes, and spend the resulting income that it would free up on whatever they see fit. Business would boom. Government revenues would rise. Et cetera.

This is why economists are not the most trusted profession. They are not the scientists they boast of being. On this point, read Harvey Mansfield's recent article, "A Question for the Economists" (Apr. 13, 2009, The Weekly Standard).

Mary Anastasia O'Grady recently entertained this question of wealth creation and general prosperity in relation to Latin America with foreign aid in mind "Aid Keep Latin America Poor," Wall Street Journal, Apr. 9, 2009). Among other sources of wisdom on the subject, including Lord Peter Bauer, she cites Alvaro Vargas Llosa's Lessons From the Poor: The Triumph of the Entrepreneurial Spirit (Independent Institute, 2008):

"The decisive element" in bringing a society out of poverty is "the development of the entrepreneurial reserves that exist in its men and women," Mr. Vargas Llosa writes. "The institutions that grant more freedom to their citizens and more security to their citizens' possessions are those that best facilitate the accumulation of wealth."

In an earlier post on development in Africa, I cited John Locke whom I will cite again. In his great Second Treatise on Civil Government (section 42), Locke appeals to the shrewdness of every ruler, saying:

This shews how much numbers of men are to be preferred to largeness of dominions; and that the increase of lands, and the right employing of them, is the great art of government: and that prince, who shall be so wise and godlike, as by established laws of liberty to secure protection and encouragement to the honest industry of mankind, against the oppression of power and narrowness of party, will quickly be too hard for his neighbours.

The lessons concerning "established laws of liberty" and the encouragement of the "honest industry of mankind" is a lesson that is continually in need of review, whether you are President of these prosperous United States or a South American oligarch.