I love this article, it points out that real wealth comes from those who produce real goods and services. In order for a nation to be wealthy, it must produce an abundance of goods and services.
The more cell phones that are produced, the cheaper cell phones become; hence, the better off society will be since more people can afford them. This same logic applies to everything else in our economy.
The WSJ reports:
If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.
It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?
Every state in America today except for two—Indiana and Wisconsin—has more government workers on the payroll than people manufacturing industrial goods.
In order to understand why the US has gone from a manufacturing economy to a service/government economy, one must understand the role interest rates play on the structure of production and the effect government spending has on the markets.
When interest rates are artificially depressed by the Federal Reserve, it spurs investors to invest in long term projects that are very interest rate sensitive, such as housing. Hence, we saw a massive housing boom leading up to the current implosion.
Interest rates act as a signal to investors that allow them to anticipate future spending and saving patterns by consumers. When interest rates are high, that means not many people are saving, so industry focuses on producing short term consumer goods such as cups, q-tips, radios, cell phones, etc… When interest rates are low, industry assumes that people are saving a lot of their money, so they focus on producing long term things like housing and cars.
When the Fed messes with the interest rates, it destroys this signaling mechanism and distorts the structure of production which leads to housing booms and stock market booms like we saw in the dot com bubble. Both were precipitated by the same monetary policies of the Fed.
Further, government spending itself distorts the market because government has an unlimited checkbook with which it can buy up real resources on the market. For example, when government builds an aircraft carrier, it buys thousands of tons of steel on the market which drives up the price of steel, making steel more expensive for every private producer of steel goods. This same principle applies to labor as well as resources.
This unlimited spending is facilitated by the Federal Reserve, which cashes the government’s bonds and keeps interest rates artificially low which allows government to spend well beyond its means.
To learn more about how interest rates effect the structure of production, watch this video by economics professor Roger W. Garrison:
You can also read his book entitled Time and Money for free here.