How Our Current System of Entitlements Harm the Economy

Yesterday, I called for a reform of the American system of entitlements. Today, I want to explain a few reasons how entitlements harm the economy.

The purpose of a stable economy is to provide material goods and services to the individuals within a nation. I assume that wealth is consumed every year (food, fuel) or over multiple years (cars, housing) and must be continually replaced by productive work. A stable economy capable of providing a high standard of living requires several components:

1. Incentives for individuals to work and produce. This means that an individual needs to expect to keep the fruits of his labors. High taxes and lack of private property protection are negative incentives. Thus, taxes must be kept low and private property respected.
2. Producers need a stable money supply in order to make long-term investments in time and effort.
3. A large percent of the population must be engaged in productive work.

The current entitlement system is decreasing our standard of living in two ways:

First: it pays able bodied individuals capable of productive work to not work thus entitlements decreases the number of individuals working. As the number of individuals paid not to work increases, the burden on the few remaining productive workers increases adding stress and reducing profits until profits disappear and production stops. If the number of individuals receiving government handouts continues to increases, America will reach a point where the economy will stall and shrink requiring a reduction in everyone’s standard of living.

Second: increasing the size of entitlement budgets takes resources away from the productive workers in society called capital. Capital is needed to buy equipment such as tractors needed for farming or heavy machinery needed in a factory. Instead of buying a piece of equipment that would produce lumber or computers, government takes this money and buys someone food. Thus, capital is taken away from production and invested poorly in consumption. Entitlements decrease the ability of industry to invest in production which, by itself, reduces everyone’s standard of living over time.

The question is not if people should be helped or taken care of. The question is if the needy should be encouraged or even required to shoulder some of the burden of providing for their own needs. To me it is simple, we reform the entitlement system and encourage more production which will lead to an increase in everyone’s standard of living or continue the present system which will result in an increase in poverty and suffering.