The Rag Reel


Saturday, October 30, 2010

Last Lifeline for Future Economic Freedom!

Jefferson Was Right

   On Nov. 2, the United States will hold an important mid-term election. At stake will be control of the U.S. Congress, 39 state governorships and thousands of other state and local offices. High unemployment, record deficits, a sluggish economy and a swelling federal government have become flash point issues for millions of concerned Americans of every political persuasion. This upcoming election is an opportunity to help decide the future of economic freedom.

   Batter Up!

   According to the International Monetary Fund, the United States accounts for about one-fourth of the world's total output of goods and services, and one fifth of the world's purchasing power. Like it or not, what's bad for the United States - including misguided federal policies that undermine economic freedom - is usually bad for the rest of the world. What has proven to be best for all societies is economic freedom. Citizens on every continent enjoy more prosperity, cleaner environments, longer lives and higher literacy rates in economically free societies.

   The Challenge

   Unfortunately, these values and principled point of views are now being strongly opposed by many politicians (and their media allies) who favor ever-increasing government. Government - like fire, water, chemicals and most everything - is productive at some level and destructive at others. In the United States, government has now grown to such a level that it is choking American entrepreneurship and hurting the nation's international competitiveness. Even worse, recent government actions are threatening to bankrupt the country. This can only stifle economic growth and job creation, which in turn will significantly reduce the standard of living of American families.

   To preserve the nation's economic viability and individual freedoms, this explosive growth must be reversed. There are, of course, plenty of politicians and critics who feel otherwise. Many of them have been quite vocal in their attacks on opposition uprisings; such as the tea party. However, as New York Senator Daniel Patrick Moyniham famously said, "one is entitled to one's own opinions, but not to one's own facts." And the facts are that the overwhelming majority of the American people will be much worse off if government overspending is allowed to bankrupt the country.

   Fateful Warning!

   When Thomas Jefferson was inaugurated in 1801, he warned about a particularly destructive way of thinking. It is wrong, he said, to punish someone for working harder or being more successful than someone else. He warned against "wasting the labors of the people under the pretense of taking care of them" and taking from some to give to others "who have not exercised equal industry and skill."

   More than 200 years later, the destruction of economic freedom that Jefferson warned against is being vigorously promoted by this administration and many elected officials. In the United States, the best antidote to this kind of over-reaching government is the power of the ballot box. That was true in 1801, and is just as true in 2010.

Sunday, October 24, 2010

The Business of Being in Business!

Business is Burning Around You!

Value Creation - Create real, long-term value by the economic means. Eliminate Waste.

   We live in an era when many people - including policymakers and media celebrities - view businesses and corporations with disdain or intense suspicion. Their way of thinking begs a simple question: What is the primary role of business? Is it to create jobs and provide benefits? Help advance a social agenda? Or just to make as much money as possible, by exploiting customers and employees? As a matter of principle, there is only one reason for any business to exist: creating value. We all tend to pursue our own interests, but in a true market economy we can only prosper long-term by providing others with what they value!

   Biting the Hand

   In a system of economic freedom, a company will generate long-term profits only if it uses resources in a way that consumers value more than alternative uses. Large or small, a company will not stay in business for long if it is not truly creating value. Unfortunately, the same cannot be said for governments. Most governments consume massive amounts of resources - primarily labor and capital - much of which doesn't create value.

   Was it worth more than $200 million of U.S. taxpayers' money to build an airport in Johnstown, Pa., that services just three commercial flights per day? Although it was never built, would the federal government have created real, long-term value by spending nearly twice that much for the infamous "bridge to nowhere" in Alaska? It is essential that use of resources is directed by consumers, rather than politically. When resources are directed for political ends, the result is misallocation.

   What About Jobs?

   Job creation is one of today's hottest topics. Governments of many nations - liberal, conservative and even Communist - are under enormous pressure to "do something" about high unemployment and lagging job growth. In reality, it is business of all sizes in the private sector, not the government, that tend to produce the sorts of jobs that create real, long-term value.

   Government interventions - particularly controls, subsidies, barriers to entry, tariffs and bailouts - misapply resources, thwarting the efficient production of what people value. An economist would say such actions replace activities that convert resources to higher-value products with activities that convert them to lower-value products. Think about that for a moment.

   If a business activity is really creating value, should it need to be subsidized? Similarly, if a business is destroying rather than creating value, shouldn't it be allowed to go out of business, rather than be subsidized or protected; i.e. Citi.


   Productivity is more than a business buzzword. It is a key driver of success for all of society. The more productive we are in enhancing the value of resources, the better off virtually everyone is going to be. By contrast, anything that interferes with productivity is going to make people less well off, especially the poor, who are least capable of weathering economic shocks.

   It is important to realize what makes us better off. It's not just how much money we have, but the availability of the goods and services we value. In the old Soviet Union, lots of people had rubles to spend, but there was very little of value to buy. Government policies resulted in chronic shortages of food, clothing and shelter. Similarly, in any nation where government policies systematically destroy value, shortages of valued goods and services should be expected.

   Good Idea?

   Government-mandated transfers from one group to another don't solve the problems of lower productivity and higher unemployment. In fact, they make those problems worse. If the government insists that someone should be paid $50 per hour in wages and benefits, but that person only creates $30 worth of value, no one will prosper for long.

   In a scenario such as this, as businesses lose money because of the government's policy, employees will end up losing their jobs and fewer (if any) new employees will be hired. Consequently, the result of what sounded good - making a guaranteed $50 per hour-will not be prosperity, it will be higher unemployment. Anything that undermines the mobility of labor, such as policies that make it more expensive and difficult to change where people are employed, also increases unemployment.

   In Europe, where stringent labor laws make it difficult and expensive to terminate someone - even for cancer - this has become especially troublesome. Similar policies that distort the labor market - such as minimum wage laws and mandated benefits - contribute to unemployment. Policies that make it difficult to get permits to build plants and equipment that are more efficient lower productivity and reduce wages. All these obstacles interfere with the ability to create valued products and services, adversely affecting consumers, employees and employers.


   Societies that value freedom and prosperity protect their citizens' rights to free speech, which greatly facilitates the discovery and the dissemination of knowledge. What we see is many nations today is just the opposite. Citizens who are openly critical of the European Union bureaucracy in Brussels or the out-of-control government of the United States are being shouted down by politicians, government officials and their media and other allies. Too many government elites think they know what's best for citizens and ignore the wishes of the citizens themselves.

   Those in power tend to want to control more and more, all in the name of making things "fair." To do so, they pile on more rules, more regulations, more restrictions, more programs and more costs. This kind of thinking is a recipe for disaster - both for a company and for a government. Over-specifying and enforcing particulars undermines prosperity, it also facilitates corruption and abuse of power, subservience and stagnation.

   After many years of disastrous policy decisions in the United States, it will be interesting to see who voters support at the ballot box this November.Will it be those candidates who believe that more government is the answer, and that government - rather than consumers - should decide which businesses succeed or fail? Or will it be those candidates who believe the true role of business is to create value for society by serving customers, not politicians?


Thursday, October 21, 2010

All the President's Men!

Economic Freedom is a mind-set!

   I am often asked which U.S. presidents pursued the best and worst economic policies. My answers may surprise you. In evaluating a President, I believe it is essential to look past his popularity, party affiliation and family background. During the twentieth century, there were several presidential standouts - both good and bad. I want to discuss one of each. In both cases, their policies changed the direction of the entire nation, affecting the lives of millions of Americans.

Silent Cal

   Calvin Coolidge was Vice President under Warren G. Harding, who became President in 1921. At the time, the United States was in a deep depression. Unemployment was at 20 percent, taxes were high and federal debt was ballooning. Harding insisted on cutting taxes, reducing the national debt and cutting the federal budget (the opposite of what his predecessor, Woodrow Wilson, had done). Following Harding's sudden death in 1923, Coolidge wisely chose not only to maintain many of those policies, but to extend them.
   In his first address to Congress, Coolidge called for further tax cuts, fewer subsidies and avoidance of foreign entanglements. "Perhaps the most important work that this session of the Congress can do," Coolidge said, "is to continue a policy of economy and further reduce the cost of government." Coolidge had a deep understanding of the need to limit government growth. His belief in property rights was reflected in his commitment to cutting taxes. "I want taxes to be less," said Coolidge, "so that the people may have more." Coolidge signed into law Revenue Acts that lowered income tax rates from 73 percent to 24 percent. He, together with Harding, also cut federal expenditures in half. "Anybody can reduce taxes," Coolidge said, "but it is not so easy to stand in the gap and resist the passage of increasing appropriation bills which would make tax reduction impossible." Where were the results of these policies?

   It is no coincidence that the Harding/Coolidge era was one of the most prosperous in U.S. history. Gross National Product, wages, profits, productivity and the overall standard of living rose substantially. Although he was quite popular and faced no term limits, Coolidge refused to run for re-election in 1928. Today, it is rare to find any politician who wishes to self-limit his time in office

   Cal's Successor  

   When Coolidge decided to step down, Herbert Hoover - who was Secretary of Commerce for both Harding and Coolidge - secured their party's nomination and went on to win the presidency. Hoover served just one term in office. During those four years he essentially reversed the course of federal policy. Hoover pushed for higher taxes and farm subsidies, and proposed costly pension entitlements. He also signed the infamous Smoot-Hawley tariff bill, a protectionist policy that helped cause global economic depression.

   Under Hoover, federal spending roughly doubled and personal income tax rates jumped from 25 percent to 63 percent. He raised corporate taxes, too, and doubled the estate tax. Hoover also pressured business leaders to keep wages artificially high, contributing to massive unemployment. By the time he left office, the U.S. economy was in shambles and the Great Depression had arrived.

   Hoover is rightfully blamed for much of the economic calamity that left millions of Americans unemployed and penniless. But it is wrong to say he caused the Great Depression by following free-market principles. Hoover did just the opposite. He undermined economic freedom. Those mistakes were then compounded by Franklin Delano Roosevelt's "New Deal," which prolonged the Great Depression. Rex Tugwell, an architect of FDR's policies, wrote: "we didn't admit it at the time, but practically the whole New Deal was extrapolated from programs Hoover started."

   Election Time!

   The United States is not electing a president this year, but hundreds of other important offices will be on the ballot Nov.2. When evaluating a candidate for public office, I ask a simple question: Does the candidate support economic freedom? Economic freedom does not "belong" to any political party. After all, both Coolidge and Hoover were Republican. Candidates of any party who believe we need bigger government, more regulation, higher taxes, increased spending and borrowing, and more centralized decision making are threats to economic freedom. Like Hoover, their policies leave all of us - especially the poor - much worse off.

   Candidates who support economic freedom realize our government is already too big and intrusive, and is spending, borrowing, taxing and controlling too much. They support a strong and efficient government, but one that operates within strict Constitutional limits and in the best long-term interests of society. If you are concerned about creating jobs, growing our economy and enhancing our quality of life, then you need to be concerned about electing candidates that support freedom. This is true everywhere and at all times, not just in the United States this November.