Dead Hand of Government Impoverishes the Middle Class

Michael Spence, Nobel Laureate and former Dean of the Stanford Business School, has just published a rigorous economic analysis called: “The Evolving Structure of the American Economy and the Employment Challenge.” The report illuminates how the unbridled growth of government consumption spending has destroyed America’s productivity leadership, driven entrepreneurs to off-shore production, and destroyed middle class wage rates.

Adam Smith, 18th Century English economist, pioneered the concept of the “invisible hand” to describe how capitalism through self-interest, competition, and supply and demand, more effectively allocated resources than the “dead hand” of the state; it levied punitive taxes, adopted restrictive regulations, and enforced monopolies to favor their crony allies. Smith described how English entrepreneurs flourished after their King’s feudal dominance of the economy was liberated by adopting the laissez-faire economics that allowed transactions between private parties to be free from the state’s coercion. Smith described how new wealth was rapidly created and compounded over time form the productivity gains of the Industrial Revolution that leveraged the value of workers and led to higher wages.

The Spence report illuminates that from 1988 to 2008, America’s productivity dominance collapsed by 70%; shrinking from 2.5% gain per year to only .7% per year. This crash in American leadership was the result of 98% of the 27.3 million new jobs created during the period coming from the lower productivity, and thus lower wage, “consumption” sector of the economy. Higher productivity, and thus higher wage, “goods-producing” sector grew by only 620,000 jobs. The root cause of this substitution for lower productivity jobs was a 23% growth in government, to 22.5 million workers, and a 63% growth in government dominated healthcare, to 16.3 million workers. Productivity for the American goods-producing sector continued to grow by a healthy 2.3% per year, but productivity of government workers sunk by 4% and productivity of healthcare workers plummeted by 9%.

In 1988 the average value added for American workers was $75,000. Over the last twenty years, America’s revolution in information-technologies helped drive up the valued added of a goods-producing American worker to $115,200 per year. But the productivity value of government and healthcare worker tumbled to $72,000 per worker; dragging down the average value added of American workers to only $90,750. That $24,450 loss of productivity explains allot about why the American middle class wages have been shrinking in the United States.



Adam Smith identifies the “entrepreneur” as the invisible hand that shifted economic resources out of lower and into higher productivity activities for and greater reward. If the invisible hand is expected to be busy shifting resources from lower to higher productivity; why has America shifted resources from higher to lower productivity jobs?

Welcome to the wonderful world of the “dead hand” of government. Over the last two decades the U.S. government has vastly increased punitive taxes, restrictive regulations, and enforced monopolies in favor of their crony allies. This result has been a loss of 7.5 million goods-producing jobs in the last twenty years. That trend accelerated over the last ten years with the closure of 57,000 factories and the loss of 5.5 million higher paid goods-producing jobs.

Entrepreneurs are not stupid! They did their arithmetic and figured out that the outrageous costs of paying twice China’s corporate tax rate, complying with punishing regulations, and competing against cronies like General Electric over-whelmed the productivity advantage of hiring an American workers. Entrepreneurs also recognized that even though they did not benefit from the 13.7% compound growth of government spending; the Congressional drumbeat to raise taxes on millionaires to pay for trillions of dollars of deficits, are “code words” for taxing entrepreneurs.

The bottom line is the “dead hand” of government has diminished the productivity of American workers by changing the structure of our economy to favor of the lower wage consumption sector, at the expense of the higher wage goods-producing sector. This government coercion has resulted in the invisible hand of entrepreneurs closing U.S. factories, moving goods-production off-shore, and impoverishing middle class wages. Entrepreneurs will not build new American factories and bring back higher paying middle class jobs until our government cuts taxes, deregulates industry, and stops favoring crony allies.

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