What does it really cost when government takes control?
The Big-Government Era
The United States did spectacularly, economically speaking from about 1780 through 1913. It was a golden age of record economic growth and real wealth accumulation. The government did practice large-scale economic destruction by creating the Interstate Commerce Commission in 1887, which began the ruination of the railroads. But in 1913, everything really changed. That is when Congress created the income tax and the central bank.
Figure 7 shows one of the results of setting up these twin pipelines transferring money from people's pockets to the government: Suddenly the government could afford wars. U.S. involvement in World War I, World War II, the Korean War, the Vietnam War, the Gulf War and the Iraq War, not to mention all the bombing going on today in Afghanistan, has been funded almost entirely by income taxes and the monetization of Treasury debt by the Fed.
Why are politicians so quick to pursue war? Figure 8 hints at an answer. Look at the outsized glory often afforded politicians who are in office when the U.S. either attacks or is attacked.
The numbers in Figure 7, by the way, are not telling the whole truth. Government has spent trillions more dollars than it has collected in taxes, by borrowing. Every penny of its debt is another burden on taxpayers. Figure 9 is closer to the truth, revealing that the federal government gobbles up 25% of the entire Gross Domestic Product. And GDP includes government spending. Take it out, and the feds spend one-third of all production. The true cost of government, however, is even higher than that, because state and local government spending, which is huge, is excluded from the chart.
Figure 10 illustrates that other great gift from the government: inflation. The dollar price of crude oil traded lower in gold-backed-dollar terms from 1859 to approximately 1913, as oil-extraction technology improved. Oil-extraction technology has continued to improve, so prices should be lower today than they were then. But they have gone up persistently. What happened? Did oilmen suddenly become stupid and unable to produce oil efficiently? No. Two disastrous actions by Congress -- the creation of the Fed and the demonetization of gold in 1933 -- stand out starkly on this chart as two sides of the launching pad that sent the dollar price of oil to the stratosphere. The government's decrees restricting oil production in the U.S. have exacerbated the situation to the point that, despite a century of improving technology, oil costs more in real terms today than it did in 1933. That's another great gift of the big-government era.
The bad news is that results of the shift to big government are on the brink of getting much worse. Inflation is pernicious, but deflation is disastrous. Inflation robs savers slowly, whereas deflation robs virtually everyone fast. Both of them are gifts from the federal government, which created the credit-pushing Federal Reserve System, the credit-guaranteeing FDIC, the credit-pushing finance companies and the wealth-destroying income tax. These agencies fostered such a massive load of bad debt throughout the financial system that the Fed will be unable to counteract its plunge to worthlessness. The biggest credit inflation ever is about to resolve in the biggest deflationary crash ever. When it happens, politicians will blame everyone but themselves.
But hey, don't forget to vote.
This article was excerpted from Robert Prechter's Elliott Wave Theorist, a monthly publication of Elliott Wave International. ©Copyright 2012 Elliott Wave International.
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