Here is a question that I would like to invite you to ponder with me for a few minutes today. How much do you know about inflation? There is one thing for sure, here at the Davidson household we have definitely felt the power of inflation, in particular every time we fill up our cars with gas or go to the grocery store.
But what is inflation, do you know? Most people think it's high prices, and it is, but there are several reasons why we have it. Inflation is simply a rise in the general price level, and it is caused by too many dollars chasing too few goods. When the government causes the creation of more money by taxing, printing or borrowing, and then has less of a corresponding increase in production, the money you have in your pocket will purchase less. Again, it's too many dollars chasing too few goods.
Here is an example. To reduce it to the lowest common denominator, let's say the government by its control of the money supply causes spending to be $1,000 and there are only 1,000 items sold. What is the value of each item sold? One dollar, right? The government then increases the money supply and causes spending to increase another $1,000 without any increase in production or items sold. At this point what is the average cost of each item? Two dollars, right? Now, you get the picture. I remember when you could buy a soft drink for a nickel.
In the earlier days of our nation's history, when our economy was much healthier, our government simply levied a tax on items that supposedly constituted "true wealth" in order to support itself. This could be land, buildings, livestock, businesses and anything else that was tangible. But as our country grew and expanded, the government grew right along with it. So did the number of government employees. Remember, these are "public" sector employees and they do not ordinarily produce anything that is tangible. One thing that makes our economy unhealthy is simply this: We have too many public sector employees riding in the wagon and too few private sector employees pulling it.
This, along with several other factors (like excessive taxes and regulations) has caused many of our nation's manufacturers to move to other countries where labor rates are lower and tax rates are more favorable. Our nation's unions bear some responsibility here as well. When vast numbers of people are unemployed, they do not contribute to the system but rather they help to drain it, like what happened in 2010 when unemployment benefits were extended for 99 weeks. What contributes to a healthy economy is a good balance between the public and private sectors.
Ever hear of a tax increase? When national politicians give away the store (to everyone in their district and elsewhere) in order to get reelected, they force the government to borrow money because they do not wish to face voters who have just had a tax increase. After incurring a national debt of more than $27 trillion, we have dug a real hole for ourselves. Can we recover? Yes, if our elected representatives develop sound fiscal policies and take the necessary steps to repair the ship of state.