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Mar
15

Production, not Consumption, Creates Wealth

Unlike manna that just falls from heaven, wealth has to be created. A tree can only be turned into a house by adding to it some mix of labor and capital. The same is true for oil under the North Sea – it can’t power my car until labor and capital are used to improve it and get it to me in a usable form.

Wealth creation is a product of production, not consumption. If I wake up one day and say, “I want a pizza”, that doesn’t create wealth. The people who create wealth are the farmers who grow the wheat for the dough and tomatoes for the paste; those who harvest the milk for the cheese; the food processors who turn raw commodities into pizza ingredients; the entrepreneur who comes up with idea to sell pizza; the bank that decides to invest capital in a pizza store; and the delivery guy who brings the pizza to your door. Each of those actors creates wealth. Consumers then destroy the wealth that was created (in this case by eating the pizza).

Public policies that are geared toward wealth creation should not focus on ways to increase consumption; they should focus on ways to increase production. China’s economy is projected to grow at an annualized rate over 9% again this year. The focus of China’s economic growth in the last decade has been increased production, not increased consumption.

Borrow and spend public policies confuse consumption with economic growth. Handing out money to consumers doesn’t create wealth, it creates consumption and consumption consumes (destroys) wealth.

As of February 6.1 million Americans have been out of work for over six months and another 8.8 million are working part time for lack of a full time job. We need strong economic growth to put people back to work. Growth based economic policy must focus on ways to encourage (or at least stop discouraging) production.

To start with, the federal government should repeal prevailing wages laws and the minimum wage. Both policies increase unemployment and discourage the hiring of labor. Next the federal government should reform and simplify the tax code to stop punishing production. Payroll and income taxes discourage work. Sales or value added taxes discourage consumption. By replacing the former with the latter, the federal government would go a long way to stimulating production in the US and putting people back into the wealth creation process.

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