At the same time, government wages and benefits have dramatically increased.

Why is this significant?  Because all government payments come from taxes, which are ultimately derived from productivity in the private sector.  So as the private sector shrinks relative to the public sector, the burden on the private sector increases, and the overall stability and sustainability of the system decreases.

Of course, individuals who receive paychecks from the government pay income taxes, just as private sector employees do. So to an individual it may appear as though the distinction of government or private pay in unimportant. But that is an illusion. At the end of the day, 100% of government-based pay has to come from somewhere, and the only place it can come from is taxes. The only method the government has to increase its payroll is to increase taxes.  (Even borrowing money just means increasing taxes later.)

By contrast, private company pay comes out of private earnings. A company can increase its earnings by becoming more efficient, producing more products, producing higher-margin products, expanding into new markets, etc.  And every dollar a private company generates creates more than a dollar of value in the economy.

Why is this?  Economics 101: someone was willing to voluntarily pay that dollar for some good or service.  That means, to that individual, the good or service was worth more than the dollar, and to the manufacturer of the good or service, the dollar was worth more than the manufacturing materials and effort.  So both sides benefited from the exchange.

By contrast, virtually nobody believes they are receiving more benefit for their taxes than what they pay.  If they did, they would voluntarily pay more taxes (to increase the benefit).  You may think taxpayers should value the benefits higher, but empirically they do not.  Hence, to the taxed individual, taxation is actually a destruction of value.  (Measuring the value created through the use of the taxed revenue is difficult, and reconciling any potential value creation to the government beneficiary against the destruction of value to the taxed individual has been proven to be impossible.)

So what does this all mean?

Private wages can effectively increase forever–limited only by the creativity and toil of people in the private sector.  But government wages can only increase as a function of increased taxes, which in turn depend upon those private wages.  So when private wages decrease, and public payments increase, the system can quickly become unstable.

Economist David Henderson of the Hoover Institution at Stanford University explains it nicely:

People are paid for being rather than for producing.

Which sounds great if you’re the one being paid.  But not so much if you’re the one doing the paying.

“Banks that received federal assistance during the financial crisis reduced lending more aggressively and gave bigger pay raises to employees than institutions that didn’t get aid.”

Using federal bank data, they compared 940 banks in the Troubled Asset Relief Program (TARP) and 7,400 banks outside it.  That’s a pretty thorough study.

Here are some of their published findings:

Lending fell
TARP banks: Outstanding loans to businesses and individuals fell 9.1% for the 12 months ending Sept. 30, 2009,
Non-TARP banks: Outstanding loans dropped 6.2% in the same timeframe.

Employee pay rose
TARP banks: Average pay rose 9.4% in the program’s first year.
Non-TARP banks: Salaries increased 1.8%.

Cost-cutting limited
Banks in TARP cut costs less than those outside the program.
TARP banks: Increased branches by 2.7%
Non-TARP banks: Decreased branches by 1.2%.

Essentially, what this says is that the banks that the federal government bailed out showed worse behavior than the banks that were not bailed out.  And by worse behavior, I mean worse according to the very metrics the government and policy makers care about and were trying to improve by bailing out those banks in the first place.

Check out the full article at:

http://www.usatoday.com/money/industries/banking/2010-04-21-tarp-banks_N.htm

This is the growth of the Monetary Base, as reported by the Federal Reserve Bank of St. Louis. As you can see, the money supply has grown steadily over the years. But in the past 18 months it has more than doubled.

What are the implications of this?

Under this program, people will receive $3,500 to $4,500 when they trade in a car and buy a new car that gets better gas mileage than their trade-in did. That covers approximately 500,000 new cars.

If you are thinking of purchasing a new car, this may be a nice additional incentive.

Of course, the skeptic in me notes the irony that the Federal Government is working to boost demand of an industry in which it now has a major financial stake. (Where are the $500 rebates for trading in an older computer, or television, for a newer model that uses less power?)

There seems to be no end to the efforts to rescue dead business models and dying industries.

http://online.wsj.com/article/SB123544318435655825.html

They give a great argument for focusing the Stimulus on Entrepreneurs, rather than traditional, moribund behemoths.

A healthy, competitive economy is like an ecosystem.  Unsuccessful businesses die young.  Successful businesses are able to grow, accumulate resources, and age.  But eventually they too give way to younger, more competitive companies.

By propping up the older firms, we are basically preventing the new, more competitive and more effective firms from taking their place.  This stifles innovation and weakens the overall system.  On the other hand, by encouraging the creation of new businesses, we find those more effective replacements sooner, and create a stronger, healthier economy.