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The Biggest Engine of Economic Growth? 8 Ways Taxpayers and the Government Are Necessary to Capitalism

Almost everything the American capitalist system needs is provided by taxpayer dollars and government action.

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In addition to the constant propaganda attacking government, there is even research trying to claim that public funding of innovation has not been a key source of revenue and growth. But those studies are off for one major reason: they don't look back far enough to where the innovations were funded.

In the San Francisco Chronicle Magazine, Shellenberger and Nordhaus lay out the most obvious examples of the government priming the pump of innovation. They remind us that the Air Force, and later NASA in the 1950s and 1960s, contracted with companies to make microchips — and loaned them money to build factories. It wasn’t until the ‘80s that personal computers took off, and increases in labor productivity didn’t translate into economic growth until the ‘90s. But it accounted for much of the post-1990s economic boom.

Another myth of the market capitalism narrative is that innovation comes out of market competition. But that notion, too, is tossed on its head. As Schellenberger and Nordhaus write, "Today's relatively inexpensive jet travel began with Pentagon procurement and R&D for jet turbines in the 1940s and '50s. But it took many decades before jet travel became accessible to the average American, and much of the rest of the world.”

Most everything the American capitalist system needs is provided by taxpayer dollars and government action. Here are eight examples. 

1. Public Trust and Economic Infrastructure

The economic system would not function without the overall infrastructure that allows commerce to operate, including guaranteeing sovereign credit worthiness and currency protection. The economy also depends on the system of law and order that enforces contracts, copyright and trade agreements. 

2. Education and Social Knowledge

Public schools, public universities, not-for-profit institutions of learning and research are all paid via government grants, tax exemptions and general tax revenues. Enormous amounts of government funds go to research in private universities, which then move out to private industries via technological innovation and production. This happens with food technology, drug development, medical discoveries and health solutions. In the 19th century, Land Grant colleges and farm extension programs built U.S. agriculture. The National Defense and Education Act (1958) put science in our schools and seeded generations of technology innovators and skilled workers.

3. Relief in Crisis, Catastrophe, or Everyday Life 

How do we spell relief? Try government. The human and social costs of economic and technological growth are borne by government— from unemployment insurance to emergency room hospital care for individuals. From food stamps and income tax credits to disaster relief and community development investment. Order and stability are maintained by the relief triggers pioneered by Bismark in the 19th century and Roosevelt in the 20th which were advanced in order “to save capitalism from itself.”

At the same time, social programs like Medicare, Medicaid and food stamps send government dollars to small businesses and retail and service providers across the country. Critics of the Affordable Health Care Act worry some about another open-ended entitlement. It is worth noting that the “open end” is at least as much about no price controls on drugs companies, cost of equipment by manufactures and hospitals, and the continued pressure for private insurance profits as it is about uncontrolled demand for service.

4. Regulation and the Public Good

The government protects food, air and water for the public good. It also shapes the successful operations of commerce via global trade agreements, tort and trust law, land use (which has long favored large property owners) builders and agricultural enterprises. New York City’s skyline of skyscrapers, including the World Trade Center, was created and recreated in the 1930s and the 1960s primarily through government spending. Rockefeller Center is most noteworthy as the first large Manhattan large-scale project to be entirely funded by private capital— but still with tax subsidies. In a parallel fashion, agricultural land-use, pesticides, farm loans and tax benefits have built agri-business’s monopoly on US food production.