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The Thatcher Line and Obamanomics

The Thatcher Line and Obamanomics

By Robert Tracinski - June 21, 2012

Years ago, the great free-market economist Henry Hazlitt wrote a book called Economics in One Lesson. The "one lesson" is: "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." If Paul Krugman and his adherents followed this rule, they might ask such questions as: why can't we continue to increase the government payroll indefinitely? Why can't we just keep writing checks? Why can't we just assume that interest rates will flop around near zero forever?

If they asked, they might find a specific answer.

Hazlett's book was in many ways just a popularization of the great 19th-century economist Frederic Bastiat's essay "What Is Seen and What Is Not Seen." Bastiat pointed out that government spending has certain seemingly positive consequences that are seen by everyone. Say, a new bridge is built with government money (an example that applied equally in his day as in ours). But what we don't see is what might have been done with that money if it had been left in private hands—the house or factory or research lab that might have been built instead. It is the economist's job to project what is not seen, the alternative uses for money taken and spent by the government, and to tally up the hidden costs of the showpiece projects that are displayed to the public.

In this case, what Obama and his defenders want us to see is very direct and simple. They want us to see the beneficial effect of government employment, the people who would prosper by bringing home a state or municipal paycheck. What they want us not to see are all of the private-sector jobs that haven't been created.

This has a direct partisan goal, of course, which is to draw our attention away from the current administration's most conspicuous failure. But it also reflects a deeper ideological agenda: a suspicion of private-sector economic activity as being driven by greed and profit, while public-sector employment is noble, selfless, and public-spirited. So they naturally lavish more concern on the latter than on the former. Never mind that public employees can become a special interest of their own, cashing in at the expense of others, as voters from Wisconsin to San Jose have discovered. Consider, rather, the moral inversion of this perspective: those who consume wealth produced by others are assumed to be good, while those who actually produce the wealth in the first place are painted as the bad guys.

Yet this is the key to Obamanomics: to focus on government action, government spending, government hiring as the key to everything—while disparaging private profit-making.

It is also the reason why Obamanomics is failing, because there is a fundamental difference between public and private employment. Public employment is not self-sustaining. Precisely because it is not oriented toward profit-making, it does not pay for itself. It relies on all of those denigrated profit-makers of the private sector to pay for it. They can pay for it precisely because they are profit-makers. A profit is simply the net creation of wealth. It means that the economic value you created from a business—the goods and services you were able to sell—have greater economic value than the resources you put into running the business and paying its workers. It is your profit, the extra money left over after you pay your expenses, that allows you to expand your business, prosper and yes, hire more people. But increased private-sector employment is a consequence. Profits are the driver.

If you don't make a profit, by contrast, your business dies. For example, you might end up pouring hundreds of millions of government dollars into building a giant new solar-panel factory that stands empty and idle because you can't actually afford to run it.

Private profit, if you make it, is also a ready pool of extra money for government to raid to pay for its expenses. Public employment is dependent on the wealth created from private production and private profit. So what happens when you denigrate private production and private profits, while constantly increasing public employment and public spending? Eventually, you don't have enough of the one to support the other. You cross the Thatcher Line.

British Prime Minister Margaret Thatcher famously said in a radio interview that the problem with socialism is that you eventually run out of other people's money to spend. This has been formalized as the Thatcher Line: the point at which the burden of government begins to overwhelm the ability of the private sector to pay for it.

(The Thatcher Line isn't my coinage, by the way. I read it somewhere else, but I can't remember who wrote it, and Google offers no help.)

The Thatcher Line explains the recent wave of reforms on the state and local level. While President Obama complains that state and local governments have been laying off workers, he has apparently never bothered to ask why they can't afford to hire anyone. It turns out that it's not because state and local governments have no money. It's because spending on government employees naturally tends to expand faster than the ability of tax revenue to pay for it.

Bloomberg's Josh Barro fills in the details for San Jose, California, a city that has seen its tax receipts grow by 19 percent over the past ten years—while the cost of hiring a full-time public employee has gone up by 85 percent. Is it any wonder, then, that the people of San Jose voted overwhelmingly for a referendum to rein in government wages and benefits—on exactly the same day that voters in Wisconsin decided to keep governor Scott Walker. They are trying to pull back from the Thatcher Line.

Europe is crashing straight through the Thatcher Line. In Greece, the public sector employs about one-third of all workers. Even the country's supposed "austerity" program has been designed to protect the public sector. In the first three years of the economic crisis, 470,000 private-sector workers in Greece have lost their jobs. How many government workers lost their jobs? None. A few months ago, the country was convulsed with riots when the government finally agreed to lay off a mere 15,000 government workers.

Does this sound familiar? It is the same mentality that shrieks that a few hundred thousand government workers are now, three years later, finally starting to lose their jobs—while it placidly declares that the private sector, where millions have been shoved into the ranks of the long-term unemployed, is "doing fine."

That's why the "doing fine" gaffe is so significant. It shows us, in one lesson, the real essence of Obamanomics—and where it is taking us. 

Robert Tracinski is editor of The Tracinski Letter and a contributor to RealClearMarkets.

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