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Dan Nestlerode: Is Bigger Better?

by on January 20, 2013 7:28 AM

We live in a society with multiple layers of taxation and government, providing multiple services to our citizens. From the lowest level we have the school district and its tax system, the township level of government and its tax system, the county level of government and its tax system, the state level with its tax system and finally the biggest of all, the federal government, with its overly complicated tax system. All of these governmental entities tax or make legal extractions from private citizens and companies. There is no requirement that the government provide its citizens anything in return for the taxes that we all pay. Taxes are a legal obligation and in no way are an exchange for comparable value, as in private sector market transactions.

I have heard that over the past 80 years, government has been growing faster than the private economy here in the United States. It seems like we are approaching a size of all government where a change in the relationship between the private and government sectors is coming to an impasse. Reinhart and Rogoff in their seminal work on the economy entitled, “This Time It’s Different” detailed how excessive government debt, likely flowing from large spending programs, begins to stifle the private sector. We are at that point right now.

So now that we have financially overpromised and under-taxed ourselves, how do we stop this runaway train from permanently damaging our country? This is seemingly related to the long-term performance of the stock market through the ability of private companies to grow sales and profits. When debt becomes 90 percent or more of the overall GDP, then the growth of the GDP slows. Depending on how you count the debt at the federal level, we are now past the 90 percent mark and continuing to increase the debt as a percentage of the GDP, ignoring the obligations at other levels of government. It is imperative to note that the size of the debt becomes less important as the rate of growth in the economy increases. The growth in the size of government is preventing the growth of our economy.

We seem to be in a great game of dividing the goodies the private economy has provided in new and wondrous ways and have forgotten that we are no longer growing the overall economy fast enough to keep our workforce fully employed. The size of government is now the cause of our unemployment issue. We look a little more like Europe.

Wealth in the world is not created by governments. Government can only redistribute the wealth of others through taxation and spending programs. Wealth is only created in the private sector through technological evolution or revolution; when old ways of doing all things economic are replaced with better, cheaper, faster, cleaner, more elegant and effective methods. Yet somehow we are under the mistaken impression that wealth and related caring comes from politicians organized as government.

Capitalism is the most successful long-term way to manage the resources of the world. It alone has the correcting mechanisms that allow it to nimbly adapt in a rapidly changing world. Government changes very slowly, if at all, unless it is overthrown. So we have the Federal Reserve printing money to temporarily put off decisive action on the fiscal front in government.

So how much should we tax ourselves and what should we expect the government to do for us? We all have different answers, of course. My sacred cow might be your wasteful program and vice versa. Yet we are at the point where the divisive conversations in government are telling us that many sacred cows are going to be sacrificed if we want to reap the fruits of an ever-increasing standard of living (wealth). Shall we kick the can of decision down the road and keep all our sacred cows or make the sacrifices needed to get our economy growing and creating wealth for all of us? I guess this is what elections are all about.

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Dan Nestlerode is the Director of Research and Portfolio Management at Nestlerode & Loy Investment Advisors in State College. A graduate of Penn State University, Nestlerode has been an investment advisor since 1965. He can be reached at danielj@nestlerode.com.
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