Tuesday, July 19, 2011

WARNING: The U.S. Reserve Fund is Dwindling Away

Richard Ebeling emails:

I have posted today a new piece on Northwood University’s blog, “In Defense of Capitalism & Human Progress,” with the title America’s Fiscal Folly and the Squandering of the 'Reserve Fund'.

I discuss the disastrous trends in taxing, spending and borrowing in the United States that are threatening the country’s economic future. I especially warn that current fiscal trends are seriously eating way at what Austrian Economist, Ludwig von Mises, referred to as the “reserve fund” of the market society: the productive “surplus” generated in excess of the scarce resources needed to maintain a society’s capital and existing standards of living. It is the “surplus” from which comes new investment and capital formation, technological innovation, and therefore, rising standards of living over time through the production of more, better, and new products for the consuming public.

I explain that in 1930 Mises had shown how in the interwar Austria of his time, governments in his native land had so burdened the Austrian economy with taxes, spending, deficit financing, and regulations and restrictions on Austrian private enterprise that not only was this reserve fund eaten up by government, but part of the “seed corn” as well. That is Austrian fiscal mismanagement resulted in capital consumption. Standards of living fell due to the private sectors inability to maintain the society’s capital supply.

And if current trends are not stopped, and indeed reversed, this might be America’s dismal future, too, at some point.
This is a very important commentary by Ebeling. The borrowings by government do not come without costs, they crowd out private sector borrowings, despite Krugman's claim that they do no such thing. But, it does not stop there, as Ebeling points out, taxes, regulations and restrictions all eat away at the reserve fund. If the trend continues, it will result in a lower standard of living for all of us and quite possibly a crash of society and the economy as we know it.

Ebeling in his column warns about every bad turn the U.S. has taken and explains how Ludwig von Mises  warned about how these bad turns ultimately lead to terrible crisis. Ebeling's full column is here.


  1. Question for you:

    How does government borrowing crowd out private sector borrowing?

  2. Frank Shostack wrote about this subsistence fund in 2004, including some great Crusoe examples:


  3. Does not government borrowing end up being spent on resources from the market? Or end up buying resources eventually going to be used at the disposal of the market?

  4. Mike, if you have $100 to invest, and you have 2 options- Gov't bonds or a private market endeavor- then any lending done to the Gov't cannot go to that private company.

    That's how it crowds out private investment. Since government "investment" is primarily wasted on unproductive (at best) or counterproductive (like TSA, subsidies, war, etc.) activities, any money lent to the gov't results in a net reduction in wealth in the society.

    Hope that helps.

    Dale Fitz