Archive for November, 2011

Economic Freedom

To Increase Jobs, Increase Economic Freedom
Business is not a zero-sum game struggling over a fixed pie. Instead it grows and makes the total pie larger, creating value for all of its major stakeholders, including employees and communities.
By JOHN MACKEY

Is the United States exceptional? Of course we are! Two hundred years ago we were one of the poorest countries in the world. We accounted for less than 1% of the world’s total GDP. Today our GDP is 23% of the world’s total and more than twice as large as the No. 2 country’s, China.

America became the wealthiest country because for most of our history we have followed the basic principles of economic freedom: property rights, freedom to trade internationally, minimal governmental regulation of business, sound money, relatively low taxes, the rule of law, entrepreneurship, freedom to fail, and voluntary exchange.

The success of economic freedom in increasing human prosperity, extending our life spans and improving the quality of our lives in countless ways is the most extraordinary global story of the past 200 years. Gross domestic product per capita has increased by a factor of 1,000% across the world and almost 2,000% in the U.S. during these last two centuries. In 1800, 85% of everyone alive lived on less than $1 per day (in 2000 dollars). Today only 17% do. If current long-term trend lines of economic growth continue, we will see abject poverty almost completely eradicated in the 21st century. Business is not a zero-sum game struggling over a fixed pie. Instead it grows and makes the total pie larger, creating value for all of its major stakeholders—customers, employees, suppliers, investors and communities.

So why is our economy barely growing and unemployment stuck at over 9%? I believe the answer is very simple: Economic freedom is declining in the U.S. In 2000, the U.S. was ranked third in the world behind only Hong Kong and Singapore in the Index of Economic Freedom, published annually by this newspaper and the Heritage Foundation. In 2011, we fell to ninth behind such countries as Australia, New Zealand, Canada and Ireland.

The reforms we need to make are extensive. I want to make a few suggestions that, as an independent, I hope will stimulate thinking and constructive discussion among concerned Americans no matter what their politics are.

Most importantly, we need to radically cut the size and cost of government. One hundred years ago the total cost of government at all levels in the U.S.—local, state and federal—was only 8% of our GDP. In 2010, it was 40%. Government is gobbling up trillions of dollars from our economy to feed itself through high taxes and unprecedented deficit spending—money that could instead be used by individuals to improve their lives and by entrepreneurs to create jobs. Government debt is growing at such a rapid rate that the Congressional Budget Office projects that in the next 70 years public money spent on interest annually will grow to almost 41.4% of GDP ($27.2 trillion) from 1.4% of GDP ($204 billion) in 2010. Today interest on our debt represents about a third of the cost of Social Security; in only 20 years it is estimated that it will exceed the cost of that program.

Corbis
Only if we focus on cutting costs in the four most expensive government programs—Defense, Social Security, Medicare and Medicaid, which together with interest account for about two-thirds of the overall budget—can we make a significant positive impact.

Our defense budget now accounts for 43% of all military spending in the entire world—more than the next 14 largest defense budgets combined. It is time for us to scale back our military commitments and reduce our spending to something more in line with our percentage of the world GDP, or 23%. Doing this would save more than $300 billion every year.

Social Security and Medicare need serious reforms to be sustainable over the long term. The demographic crisis for these entitlement programs has now arrived as 10,000 baby boomers are projected to retire every day for the next 19 years. Retirement ages need to be steadily raised to reflect our increased longevity. These programs should also be means-tested. Countries such as Chile and Singapore successfully privatized their retirement programs, making them sustainable. We should move in a similar direction by giving everyone the option to voluntarily opt out of the governmental system into private alternatives, phasing this in over time to help keep the current system solvent.

In addition, tax reform is essential to jobs and prosperity. Most tax deductions and loopholes should be eliminated, combined with significant tax rate reductions. A top tax rate of 15% to 20% with no deductions would be fairer, greatly stimulate economic growth and job creation, and would reduce deficits by increasing total taxes paid to the federal government.

Why would taxes collected go up if rates go down? Two reasons—first, tax shelters such as the mortgage interest deduction used primarily by more affluent taxpayers would be eliminated; and secondly, the taxable base would increase considerably as entrepreneurs create new businesses and new jobs, and as people earn more money. Many Eastern European countries implemented low flat tax rates in the past decade, including Russia in 2001 (13%) and Ukraine in 2004 (15%), and experienced strong economic growth and increased tax revenues.

Corporate taxes also need to be reformed. According to the Organization for Economic Cooperation and Development, the U.S.’s combined state and federal corporate tax rate of 39.2% became the highest in the world after Japan cut its rates this April. A reduction to 26% would equal the average corporate tax rate in the 15 largest industrialized countries. That would help our companies to use their capital more productively to grow and create jobs in the U.S

Government regulations definitely need to be reformed. According to the Small Business Administration, total regulatory costs amount to about $1.75 trillion annually, nearly twice as much as all individual income taxes collected last year. While some regulations create important safeguards for public health and the environment, far too many simply protect existing business interests and discourage entrepreneurship. Specifically, many government regulations in education, health care and energy prevent entrepreneurship and innovation from revolutionizing and re-energizing these very important parts of our economy.

A simple reform that would make a monumental difference would be to require all federal regulations to have a sunset provision. All regulations should automatically expire after 10 years unless a mandatory cost-benefit analysis has been completed that proves the regulations have created significantly more societal benefit than harm. Currently thousands of new regulations are added each year and virtually none ever disappear.

According to a recent poll, more than two-thirds of Americans now believe that America is in “decline.” While we are certainly going through difficult times our decline is not inevitable—it can and must be reversed. The U.S. is still an extraordinary country by almost any measure. If we once again embrace the principles of individual and economic freedom that made us both prosperous and exceptional, we can help lead the world towards a better future for all.

Mr. Mackey, co-founder and co-CEO of Whole Foods Market, is a member of the Job Creators Alliance, a nonprofit devoted to preserving free enterprise.

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Crony Capitalism Part 2

Rick Santorum’s proposal to eliminate Corporate Income Tax for the Manufacturing sector is a perfect example of Crony Capitalism. Although he says that he isn’t picking winners and losers and it seems broad enough that lots of people can get behind it, it’s still crony capitalism. He also has logic behind it. In his mind a manufacturing job is how someone without a college degree moves into the middle class so that their kids can go to college and move up the income scale – the American Dream. But is he correct?
I only have two questions with the proposal – Why? and how?
He says that someone trying to get ahead can move into the middle class by getting a job in the manufacturing sector. Get a job, make a good salary, save money, send kids to college, American Dream right? But is he looking in the rear view mirror? That may have been true when the job was with Chrysler with the UAW behind you but is it still today. A “Manufacturing job” does not necessarily pay $35 per hour. Although I have no statistics I would hazard a guess that there are more jobs at $15 per hour than at $35. (I just didn’t a google search and found somewhere that said Toyota Jobs in WV pay $21,000 per year – that can’t be right can it?) Companies are still out to make a profit and they will pay the minimum that the market will allow. (By the way, that’s what we want). Secondly, not all manufacturing is created equal. It might be true that you can do it if you are working in an Intel fabrication plant but it wouldn’t necessarily be true if you are screen printing t–shirts. Within any job/field you have to work hard and move up. There is no lottery ticket. Even that t shirt job if you work hard and bust your butt you can use it as a stepping stone to get another better job or you can just do the minimum and keep getting $9 per hour and bitching over your beer at night. No guarantees.
The second question is how? How do you define a manufacturing company? What percentage of the work needs to be in manufacturing to pass muster? Does the tax exemption only apply to the plant that manufacturing takes place? Do I have to develop internal transfer pricing mechanisms to determine profit at that plant? What if I have a distribution center attached to that plant? Does that count? It I put offices there and have my designers there, do they count? What about the accountants doing all of this counting, do they count? I can see a lot of lawyers and accountants getting a lot of fees to make companies into “manufacturing companies”.
They only way to move up into the middle class is thru hard work and freedom. A quick story. 17 years ago my wife and I moved into a new house and hired a company to paint it. The crew showed up and they were mostly Brazilian. . At one point during the job he approached my wife and said to her that if she was interested in a cleaning lady his wife did great work. He handed her a card. A couple of weeks later my wife called his wife and hired her. Over the years they were sponsored for citizenship by the painting contractor and got it. The husband went off and formed his own painting company and has a couple of crews working for him. The wife still cleans our house. She has a couple of people working for her and does a great job. They have two kids who have both gone to college. They travel to Brazil twice a year for two weeks and go other places at least once a year. (When my wife sees the pictures on Facebook she asks me why our cleaning lady has been to Egypt (or Alaska or wherever) and we haven’t). To me, they are the American Dream. Hard Work, Play by the Rules and the Freedom to succeed or fail on your own.

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Crony Capitalism

In the media, there has been lots of reporting about how the Tea Party and Occupy Wall Street are either exactly the same or totally different. Unfortunately, because neither are formal established political parties with National Committees and platforms it is not possible to sit down in a deliberate manner and compare the official policies. What can be understood is that both represent frustrated citizens.

Tea Party members seem to be frustrated with a government that is too big, takes too much of their money and delivers little in return. They see connected parties (Unions and Big Corporations) using the government to funnel tax dollars either directly or through tax credits and deductions into their pockets. The OWS crowd is mad at Wall Street. Mad that Wall Street got bailed out and they didn’t. If you read between the lines it’s not only Wall Street that gets them mad but the government that bailed them out. The interesting thing is that as you peel back the onion for both groups and get to the root of their complaints there are frustrated with large special interests getting free stuff from the government. The difference is OWS wants their cut (free tuition or bailout of student loans) and the Tea Party wants it to stop, but the both are mad about Crony Capitalism.

Crony Capitalism doesn’t solely exist on one side of the aisle or the other. It is independent or maybe codependent is a better word. Both Republicans and Democrats practice it. Anytime a group uses their relationship with a politician to extract a favor (or as economists call it “Rent Seeking”) they are practicing Crony Capitalism. It can take the form of the Teacher Pensions that are sought by the Unions. Or the loan guarantees for Solyndra that were favored by their investors and the Greens. They include Ethanol Subsidies that are endorsed by politicians of both strips. Or Sugar Quotas that are a favorite of Florida Republicans. Pages and pages could be filled listing the myriad of Rents that have been sought. (As a matter of fact the US Tax code covers over 6,000 pages most of which are the result of Crony Capitalism).

Everyone makes excuses for their particular brand of Crony Capitalism. “The mortgage deduction is crucial because owning a home is the American Dream and supports family”. “It’s about educating our Children”. “College wouldn’t be affordable if it weren’t for the student loan program”. “It’s a hand up, not a hand out”. Blah, Blah, Blah. As conservatives we should be against Crony Capitalism of every kind. Every week we experience how bad government is at picking winners and losers, we see the unintended consequences of these decisions, we see power hungry politiciansusing our tax dollars and code to curry favor with certain groups in order to get reelected. What they should be doing is creating an environment where every American has the same opportunity to be successful or to fail on their own merits. As Milton Freidman said “the important part of the profit and loss system is not the profit, but the loss”.

Nice thoughts Dave, but what does this mean. How can this cycle be broken? We need to demand 3 things – 1) transparency in elections. Anyone funding a candidate should be listed on the web within 24 hours. Let the voters decide if the candidate is selling their votes. 2) Simplify the tax code. Those 6,000 + pages are filled with sweatheart deals. If rates are reduced and loopholes are eliminated the incentive to Rent seek is lowered and everyone is on an even keel. 3) Reduce the size of the budget. Why do you rob banks? Because that’s where the money is. When the government spends $3.7 Trillion in one year that is a lot of opportunities for special deals “that no one will notice”.

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