Americans are far less prosperous than they could be, for three reasons:
• Government uses resources that would otherwise be used productively in the private sector (19 percent of GDP in 2003).
• Government discourages work and innovation by taxing income at progressive rates and by transferring income from the productive to the non-productive (12 percent of GDP for recipients of Social Security, Medicare, Medicaid, etc., in 2003).
• Government regulation stifles innovation and raises the cost of producing goods and services (a net loss of 16 percent of GDP in 2003).
Because of the cumulative, corrosive effects of government spending, progressive tax rates, redistributive welfare schemes, and regulation, GDP is now as much as 45 percent below where it could be.
Here's what happened: Real GDP began to rise sharply in the late 1870s, thanks mainly to the Second Industrial Revolution. Despite the occasional slump -- which the economy worked its way out of, thank you -- things continued to go well until 1906. Then the trajectory of GDP growth fell suddenly, sharply, and (it seems) permanently.
Why? First, the regulatory state began to encroach on American industry with the passage of the Food and Drug Act and the vindictive application of the Sherman Antitrust Act, beginning with Standard Oil (the Microsoft of its day). There followed the ratification of Amendment XVI (enabling the federal government to tax incomes); World War I (a high-taxing, big-spending operation); a respite (the boom of the 1920s, which was owed to the Harding-Coolidge laissez-faire policy toward the economy); and the Great Depression and World War II (truly tragic events that imbued in the nation a false belief in the efficacy of the big-spending, high-taxing, regulating, welfare state).
The Great Depression also spawned the myth that good times (namely the Roaring '20s) must be followed by bad times, as if good times are an indulgence for which penance must be paid. Thus the Depression often is styled as a "hangover" that resulted from the "partying" of the '20s, as if laissez-faire -- and not wrong-headed government policies -- had caused and deepened the Depression.
You know the rest of the story: Spend, tax, redistribute, regulate, elect, spend, tax, redistribute, regulate, elect, ad infinitum. The payoff: GDP per capita was almost $38,000 in 2003; without government meddling it might have been as much as $68,000.
The moral: By entrusting our economic security to government, we have lost untold trillions in wealth and income.