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Does growing government cause general prosperity?

Does growing government cause general prosperity?

Fred Birnbaum
August 27, 2015
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August 27, 2015

I recently opened a letter from the Intermountain Gas Company. I usually cringe when I get a letter from a utility, because more often than not, it signals a rate increase. After all these highly regulated entities are quasi-governmental and often operate on a cost pass through basis. This letter was different. Intermountain Gas Company filed an application with the Idaho PUC to decrease its overall prices by 5.69%, if approved, effective October 1, 2015.

The reason: natural gas prices have declined.

According to Intermountain Gas, the proposed decrease will result in prices that are 35 percent lower than in 2005, yes 35 percent lower than 10 years ago. Are your property taxes 35 percent lower than 10 years ago?

I bet not.

I point this out to get people to think about what causes prosperity. Many in the progressive community mistakenly believe government policies, programs, and regulations drive middle-class prosperity. They tell us that increases in the minimum wage, Medicaid expansion, food stamps and other redistributive programs, help people and therefor increase prosperity. In the short term some programs may actually assist people, but do they really sustain prosperity?

I think not and here is why. If we go back to the example of Intermountain Gas we quickly understand that they are simply passing through a market based decline in the price of natural gas. Are the wages of gas drillers down 35 percent? No, productive investment in gas drilling techniques – commonly called fracking -- and access to gas wells largely on private land (with far fewer regulations and permits required than on federal lands) have hugely reduced the cost to produce natural gas providing a cost competitive and abundant energy source.

The real take-away: productive investment coupled with a competitive marketplace produces prosperity by lowering real prices – the prices that people pay relative to their wages.

If we simply mandate higher wages, business paying those wages will pass those higher costs onto consumers -- including those who just got a minimum wage increase -- in the form of higher prices. Some businesses can absorb these increases. Others may actually fold.

In countries like Argentina, there is an ongoing cycle of government mandated wage increases, followed by consumer price increases, followed by mandated wage increases – price inflation soon triumphs over mandated wage increases and people get poorer. Another possible outcome is businesses simply substitute technology and capital for labor – they invest in labor saving devices. Higher unemployment becomes the norm and wages stagnate as has happened in much of Europe.

The real story about fracking is that it has boosted the nation’s prosperity, all of us as consumers use energy directly and indirectly. No mandates, no robbing Peter to pay Paul, no higher property taxes, or higher sales taxes were needed.

Growing government takes from A and gives to B, as decided by politicians and bureaucrats. It is more than just the dependency angle, what we don’t see is what productive investments never happened because government took those resources in the first place.

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