What Makes a Country Rich?



Parthenon

During the election this week, Greek voters decided to oust the party that has been leading the country for the last few years and put into place many individuals from the Syriza party, which some describe as Marxist.  You will remember that Greece was facing an economic collapse just a year or so ago that was prevented only because to loans made by Germany and other European countries that were in better economic shape.  In exchange for these loans, Greece enacted “austerity measures,” which meant cutting government spending and raising taxes.  With the election of members of the Syriza party, voters are saying they wish to cast off austerity measures and open up the government spigots again.  This will no doubt upset their lenders, leaving Greece on their own.  Perhaps a total collapse is the only way that Greece could become prosperous again.

While I have no doubt that there are a lot of wonderful Greek people who don’t deserve to go through such hardships, I can’t help but watch the situation with a tinge of Schadenfreude.  I would love to see a turn-around where the citizens of Greece stopped doing the destructive behaviors that have caused their economic troubles and instead started doing things that would put them on the path to economic stability and prosperity.  Watching the situation between Greece and the rest of Europe is a little like watching your mother send checks off to your lazy brother who sits around and plays video games, spending ever dollar that comes into his hands.  You know that the situation is economically unsustainable and eventually will collapse, even if it is with the death of your mother, so you would much rather get the inevitable collapse over with so that the healing can begin.  To make it worse, the people of Greece being helped by Germany’s kindness are bad-mouthing their savior and complaining about any interruption in their leisurely lifestyle.  They should be happy to be given bread to eat, but instead they’re complaining that it’s white and not whole wheat.

So why is it that there are countries like Germany that are so wealthy and others like Greece that are bordering on the brink of insolvency?  Is Germany just more fortunate or lucky?  Do they have a better piece of land or more natural resources?

Really what makes a country rich are the same things that make a family rich.  It is a matter of how much the citizens of the country are producing, because wealth comes from production.  Countries that are rich have policies and economic systems that promote production.  They also have a population willing to produce and effective tools to make production efficient.  Countries that make it easy to create those tools will be wealthier.  (Note, yes, some countries are rich because of natural resources such as sitting on a lake of oil, but even in those countries the leadership often keeps all of the wealth from selling the resources and leaves the population in general desperately poor.)

And this makes sense.  If you have each family in a country producing a house during a given year, at the end of the year everyone will have a house.  If everyone is growing crops, there will be plenty of food to eat.  If many people are producing tools, there will be a lot of tools available to make work more efficient.  And if a country has a lot of backhoes, cranes, and other equipment, they can build skyscrapers, canals, and other things to make life a lot more comfortable.  You first need people producing enough food, clothing, and shelter to meet their basic needs, then people producing tools to make parts, and then people producing the cranes and the backhoes.

Countries that are poor have few people producing.  In almost every case there are things that discourage production such as war or a corrupt government that steal production.  Some are torn by war, so people are just trying to survive.  Things of value get destroyed or stolen quickly, leaving little incentive to produce anything that you don’t need immediately.  Other countries have never gotten production methods to the point where they have enough time to make the tools that make it possible to become more productive.  Everyone is scraping for food and shelter, leaving little time to build quality hammers, saw, shovels, and other implements, let alone tractors.  Often such societies are victims of constant war as well, or have leaders who take whatever excess is produced, leaving little incentive to produce more.  There are also a few primitive societies remaining who have established lifestyles that follow the game herds, making development of things like windmills and substantial shelters impractical.

Then there are some countries like Greece that could be very rich, and were in the past, but have developed a culture and a companion government that discourages work and production.  Leisure time is seen as a right and highly valued, while hard work is seen as a waste of time.  High amounts bureaucracy, coupled with high amounts of corruption, make it very difficult to produce things, so people give up trying.  Those who do little are just about as well off as those who do a lot since people who work hard are highly taxed to pay for those who do not, so there is little incentive to work and produce.  Greece also has been enabled by a series of different countries over the last fifty years or more, allowing them to live a lifestyle beyond what they were producing.  Each time they exhausted their supporter, they moved onto another country like a tape worm that kills its host then finds another.  It is somewhat comical, somewhat frustrating to see the citizens of Greece upset with the citizens of Germany whenever the least stipulation is called for when a loan is made.  This is like a spoiled adult child unhappy when his parents say he needs to hold a job before they’ll pay his rent.

So what can a government, and more importantly, the people of a country do to make their country wealthy?  It’s simple:

1.  Create a safe area free from crime and seizure of goods and property by outside countries.  Without a safe zoneand security for the producers, no country can prosper.

2.  Create an economic system that rewards production.  The more you create, the more you get.  This encourages people to leave their homes and produce things, rather than engaging in leisure activities and doing the bare minimum needed to get by.

3.  Keep bureaucracy to the absolute minimum.  A small amount of regulation is needed, but make the barriers to starting and running a business as low as possible.  The more competition there is, the more everyone’s production increases, the cheaper the prices of goods become, and the higher wages get.

4.  Do not tolerate any form of public corruption.  Put people who demand bribes or use their office for personal gain under the jail.

5.  Make government as small a burden on people as possible.   Keep taxes low and use them only to provide defense and necessary functions of government to keep things running smoothly.  Resist the urge to tax and take from one party and give to another.

6.  Provide for strong property rights.  People will not produce if their property can be seized at any time.

7.  Before any sort of assistance is given, expect people to do all that they can to provide for themselves, then let private charities do what they can.  Give out temporary public jobs to help those between jobs rather than providing money and goods directly.  Always make sure there is an advantage to work.

In many ways, the United States is heading down the path that Greece took about a hundred years ago.  One look at where they are should make anyone want to stop heading down that path and take another.

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

7 thoughts on “What Makes a Country Rich?

  1. I think that the biggest problem with America is they are making it too difficult for young people to succeed. Tuition costs have tripled over the past 30 years and good paying part-time summer jobs have disappeared. Graduating with $100,000 of student debt doesn’t encourage young people to be productive. The rich are allowed to deduct unlimited mortgage interest on their mansions and second homes which includes yachts. How about a little more tax fairness!

    • Thanks for the comment!

      I think you’re overstating student loan debt a bit – $30,000 is the average as of 2013, but you’re right, there are people with $100,000 in student debt. But why is it so high? Student going into things like the ministry are going to expensive private schools on student loans despite being likely to get a first job as a youth minister making $30,000 per year. Students taking five or six years to graduate and spending the whole time at a university or even elite private colleges rather than getting otu as fast as possible to limit their student loan debt. People using student loans for living expenses while they take a minimal numbers of classes. Students who can’t afford tuition at a four year college not taking the obvious path through the community college to save tuition and living expenses the first two years.

      Because of the loans, colleges then see no restraint on costs because more students just get more student loans if they raise tuition, so they are able to build lavish student centers, expensive computing facilities, huge student work-out facilities, and other accommodations that really aren’t needed for an education with out seeing the number of students attending drop. In fact, they need to do these things to attract students because they expect such luxuries now. Who could possibly get through college without a surfing simulator? The students happily take these loans, go to the expensive universities with all of the extras, and then complain about loan debt when they get out. If more students would do a cost analysis of the cost of college versus the salary they would get when they got out for their major, they’d choose differently. But they don’t – they just sign up for the loans and don’t do anything to limit the amount of loans they take out. In many cases, however, they just default on their loans, so they really don’t pay for them anyway.

      I’ve written to my state representative and asked him to stop having the state universities take student loans. I invite any readers to do the same. There would be a lot of angst and gnashing of teeth at first as the colleges were forced to cut back the cost of their product to what the public could afford, but in a year or two the students would be much better off. It would also force the students and their families to find ways to pay for college rather than putting it on a loan.

      As far as the yacht deductions go, check out the Fair Tax at http://www.fairtax.org. It would get rid of all deductions.

    • I don’t think you’d want a tax policy that would not allow the 1% to get richer, since that would mean there would be no incentive for them to continue hiring people and providing better products. They would just scale things back to the level needed to maintain their wealth. They might also go somewhere else that would allow them to become richer.

      As far as addressing the problem of “them” and deductions, the Fair Tax would result in a $4 M yacht buyer to pay about $800,000 in taxes when he bought the yacht, and there would be no tax deductions for income taxes because there would be no income taxes. People who made just enough to pay for necessities would pay little or no taxes because they would receive a “prebate” that would be enough to repay them for taxes they pay on basic things like food and shelter. The key is just getting people into office that will enact it, which will be difficult because it removes a lot of their power, which means they’ll get fewer meals at various 5-star restaurants from rich people who want to maintain their tax breaks.

      • Sorry, do you really think that the rich will leave America if mortgage interest deductibility was limited to a million dollar mortgage? Do you think that the rich would stop investing in stocks if the low capital gains tax required a three year hold period? As far as your fair tax system, it will never happen with the Republicans controlling both houses. They shut down the government over the Bush tax cuts for the rich. Do you think that the rich should get social security just because they put a fee dollars into the program. Warren Buffet is getting social security, he thinks that he should pay more in income taxes.

      • It really doesn’t matter which major party controls Congress of the White House. The Fair Tax removes their ability to choose winners in the tax system, which means fewer campaign contributions and less wining and dining for elected officials. To get it passed will require an end to career politicians, which means term limits, which would require something like the Convention of States.

        As far as your other questions go, would a wealthy person leave because of a mortgage deductability limitation? Maybe, maybe not. Wealthy people have homes all over the world, so there is no reason to think that they wouldn’t change their principal residence if it saved enough in taxes. Smart wealthy people will hold a stock forever since that results in the best gains and the least taxes, so I don’t know what a 3-year holding period would accomplish.

        But really, would eliminating the mortgage deduction or phasing out Social Security eligibility for wealthy individuals (who would have paid about $500,000 or more into the systems over their working lifetimes if they had an income that required the maximum contribution) really make any difference at all when it comes down to things like the price of college? A few hundred people paying an extra $100,000 in taxes would not pay for the college bills of more than a handful of students. It would be something like $1 off college per student if spread evenly to all students. To really have an effect, you’d need to take everything, and that is a one-trick pony and would result in an implosion of the economy and misery for all. Is that really a plan, or is it just envy?

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