What exactly went wrong in Germany? Thomas Jefferson had been dead for 150 years when Adolf Hitler came to power. But he would have recognized the broad outlines of the problem. Jefferson: "My reading of history convinces me that most bad government results from too much government."

Too much security turned out to be as deadly to the people who created it as to those who fought against it. Even after the Germans had surrendered, the dying continued. The Allies turned their heads as 13 million Germans were expelled from Prussia, Poland, Hungary, Rumania, Czechoslovakia, and other nations in Eastern Europe.

It was not a pretty sight. The Germans call it "die Flucht"...the biggest 'ethnic cleansing' in all history. Hundreds of thousands, perhaps millions - mostly women, children and old men - died en route. That too, was part of the cost of Germany's 'too much' reliance on military power. Once the downside began...it was a long way down.

But suppose the government had confined its activism to helping people rather than killing them? Suppose Heinrich Himmler put flowers in his hair and Adolf Hitler went to anger management sessions. Suppose they turned their energies from mass murder abroad to 'making a difference' at home?

Is there any limit to the good works they might have realized? Could the world ever have 'too much' improvement? Where's the downside?

You fill the tank of your car. Minutes go by as the big tank fills, with a deep gurgling sound coming from the mouth of the tank. It gets fuller and fuller, better and better. Then, you hear a different sound. The tone changes as the neck of the tank fills quickly. It is time to click the nozzle and stop.

How much gasoline has been spilled on the ground by people who failed to stop when they should have? The problem has been greatly alleviated by the invention of the automatic nozzle, which closes when it senses a back-up. What a shame similar devices have not been developed to stop people from overdoing it in other ways!

How many desserts have been consumed by people who passed the point of diminishing returns at the starter course? How much money has been wasted on investments whose rates of return sank to zero...and kept declining?

How many couples should have kissed and made up at the breakfast table rather than continue their argument through dinner? And how many armies should have called a halt at their own borders?

Here we examine a well-known, but little studied, phenomenon - what happens AFTER you have gone too far...and what you get after declining marginal utility has turned into negative utility.

Calories that shouldn't be eaten...money that shouldn't be spent...things that shouldn't be said and wars that sensible people shouldn't fight - they are all part of The Downside, where every success is measured in red and every step forward is a march to hell.

So, let us turn away from the warfare state to the welfare state. Surely, you can't over-do it when you're trying to help people, can you? Which brings us back to the world, and specifically, the United States of America, circa 2012.

Never before in the history of the world have so many people devoted their lives to trying to the make the world a better place. What is government if not an organization that works to improve the lives of its citizens? Surely, every one of its employees strives to "make a difference" in a positive way.

The baker may be said to improve the lives of his clients, but he does so unintentionally, almost accidentally. He is just trying to support himself. If anyone else gets a benefit out of his actions it is purely coincidental. And the auto mechanic too. And even the psychiatrist. Each looks after his own.

Any improvement in the lot of mankind is offset by the money each charges. In theory, the world comes out even, exchanging one resource for another. That is how the market system works. A buyer exchanges with a seller. One gives up something; one gets an equal value in return. Even Steven.

But in the year of our lord 2012, 2.65 million people work apart from the market system. They are the employees of the US government whose purpose is not to render any service nor produce any manufactured good in an even exchange for money. Instead, the GS 1's through GS 12's have a more important and more general mission.

If the bakers and auto mechanics only got back from government what they actually paid for they would have no reason to go to government at all. They can get what they pay for in the private sector. They must get something more from government. Or something different. Something not available in the market.

The people on the federal government payroll, if they thought about it at all, would probably think that they were hired to increase the sum of human happiness by correcting the failures, oversights and shortcomings of the market system. If they labor for the SEC, they believe they improve the way securities are bought and sold.

If they draw their pay from the Department of Education or one of its many subsidiaries or any of the institutions of higher or lower learning supported in part or in whole by the feds, they believe they provide some fillip to the educational process that is beyond the reach of the free enterprise system.

As for the central bankers, who knows what they really think? But to the outside world they maintain that they can do a better job of selecting the interest rates paid on short term notes than the buyers and sellers of the notes themselves.

As mentioned earlier, a similar conceit has taken over almost the entire economics profession. The world created by able buyers and willing sellers isn't good enough for them. They aim for a better one. And they believe their professional training gives them the tools needed to improve it.

Without coming to any conclusion about how good their training was...or how well they are able to accomplish the enormous task in front of them...let us merely look at the tools themselves. Whereas the classical economist, before Keynes and econometrics, was a patient, neutral observer, the modern, post-Keynes economist has ants in his pants and help in his heart.

He cannot sit idly watching his flock, like a philosopher studying a group of sinners...or a botanist watching plants. Instead, he comes on the job, opens his tool chest, and gets to work. But what tools does he work with? Numbers.

If you are going to improve something you must be able to measure it. Otherwise how do you know that you have made an improvement? How do you know there is any improvement to be made? But there is the problem right there. How do you measure economic performance?

You need numbers. But when we look carefully at the basic numbers used by economists we find that they are fishy...if not outright fraudulent. These numbers claim to have meaning. They claim to be specific, scientific and precise.

They are the evidence and the proof that led to thousands of Ph.D. awards, thousands of grants, scholarships and academic tenure decisions. More than a few Nobel Prize winners also trace their success to numbers. They are also the basis of weighty decisions and far-reaching policies that change the lives of millions of people.

1...2...3...4...5...6...7...8...9...

There are only 9 cardinal numbers. The rest are derivative. These numbers are useful. In the hands of ordinary people they mean something. Three tomatoes is different from 5 tomatoes. Three buckets of 5 tomatoes each is 15 tomatoes.

In the hands of scientists and engineers they are indispensable. Careful calculations allow them to send a spacecraft to Mars...and then drive around on the Red Planet.

But a useful tool for one profession may be a danger in the hands of another. Put a hairdresser at the controls of a 747...or let a pilot cook your canard a l'orange... and you're asking for trouble. So too, when an economist gets fancy with numbers, the results can be catastrophic.

The old, classical economists were suspicious of numbers. They were not 'bean counters' or mechanics. They were observers. By watching what people did - and how economies actually worked - they induced 'laws' or 'principles' that helped them understand what was happening and predict what would happen next. There was, for example, the 'law of supply and demand.'

Or the aforementioned 'law of declining marginal utility.' Economists back then did not earn much money. So they took their recompense in other forms, often by naming one of these newly discovered 'laws' after themselves.

Jean Baptiste Say discovered that "products are paid for with products" not merely with money. (He meant that you needed to produce things to buy things...you could not just produce money.) It is today called 'Say's Law.'

Gresham noticed that if people had two different kinds of money available to them, they would spend the weakest of them first, and keep the good money in storage.

We're not above eponymous vanity either. So we give you Bonner's Law: In the hands of economists, the more precise the number, the bigger the lie.

An article appeared in the press on Oct. 4, 2012. "Health care as 'income' for the poor.' The New York Times reported that the Congressional Budget Office had decided to include government's health care spending, dollar for dollar, as income to American families.

In the wink of an eye, the numbers boys at the CBO increased the household income of the bottom 5th of the population by $4,600 per household...thus lifting hundreds of thousands up above the poverty line.

The government does indeed spend nearly $8,000 on the average Medicaid beneficiary per year. As for the average Medicare recipient, the total rises to $12,000. So, the quants seem to be on solid ground in adding this money to the 'income' of the people who receive it.

The NYT is much too earnest a journal to mention it, but this opens up vast new possibilities for the number crunchers. Do the poor not also receive their share of other spending? Their children are educated, almost entirely at the expense of the government. Take the median number of children.

Take the cost of a private school education. Add that to the typical low-income household. Presto! They're now a middle-income household. No kidding. Do the math. Or make it easier. Take educational spending, $809 billion. Add it to household income. You just increased the average household income of the lowest fifth of the population by $7,000.

And what about security? Don't American households benefit from US 'security' spending? If they don't, why do we spend the money? The feds spend about $800 billion on 'security.'

And if you added in all the crackpot spending justified in the name of security - such as building a US embassy in Baghdad that can withstand a nuclear attack - the total is closer to $1.2 trillion. Divide that by 114 million households. Now, you can add another $11,000.

In fact, what is the entire US federal budget - not to mention state and local budgets - if not a benefit to the citizens, residents, and illegal immigrants of the United States of America? So, take the whole damned budget and divide it up. And now we have the poorest people in America with household income of about $55,000. Voila, we have won the war on poverty without firing a shot.

More soon...

Regards,

Bill Bonner
for The Daily Reckoning Australia