You can’t escape it; capitalism has a bad rap.
Recently, thousands of anti-capitalist protestors took to the streets in capital cities across the world. Wearing V for Vendetta-inspired Guy Fawkes masks (most of which are made in China), these self-styled “anti-establishment” demonstrators, who took part in annual Million Mask March, sought to express their dissatisfaction with the capitalist system and the unfair outcomes it allegedly creates.
More than 70 percent of Millennials would likely vote for a socialist candidate.
Large anti-capitalist protests like those we saw last night are, of course, nothing unusual. In August, French police resorted to using water cannons and tear gas to disperse thousands of anti-capitalist demonstrators who were protesting in the French coastal town of Bayonne, during the G7 summit which was taking place in a nearby resort.
But it is not just during protests that we see disdain for capitalism. All over our newspapers there are headlines such as, “Capitalism is in crisis,” “Capitalism is failing,” or most recently “Capitalism is dead,”—the latter being a recent quote from billionaire Salesforce CEO, Marc Benioff, who amassed his fortune thanks to the capitalist system.
Public View of Socialism
The consistent bombardment of capitalism in our media and on our streets has culminated in a recent YouGov poll showing that nearly half of all Millennials and Gen-Z’ers hold an unfavorable view of capitalism. The same poll also found that more than 70 percent of Millennials would likely vote for a socialist candidate.
It is fundamentally trendy to be socialist, and to decry the alleged ills of capitalism. But does this persistent condemnation of capitalism hold up to scrutiny?
Every year, the Fraser Institute, a Canadian think tank publishes its Economic Freedom of the World (EFW) report in order to find out which countries have the freest (i.e. most capitalist) economies. The EFW ranks the level of freedom of 162 economies, using 43 indices, across major policy areas: size of government, legal systems and property rights, sound money, freedom to trade internationally, and regulation.
More than 27 percent of people in the most socialist economies live in extreme poverty but that number is just 1.8 percent in freest economies.
The idea behind the EFW report is that if you can find out which countries have the most capitalist economies, you can then use this information to see if more capitalist countries have better outcomes for their citizens when compared to their more socialist (or at least: less capitalist) counterparts. To analyze the correlation between economic freedom and human wellbeing, the EFW splits the 162 economies into quartiles, based on their level of economic freedom. And the results are staggering.
The average income in the most capitalist quartile of countries is an astonishing six times higher, in real terms, than the average income in the least capitalist economies ($36,770 and $6,140 respectively). For the poorest in society, this gap widens even more. The bottom 10 percent of income earners in the most capitalist countries make, on average, seven times more than the poorest ten percent in the least free economies.Similarly, more than 27 percent of people in the most socialist economies live in extreme poverty (as defined by the World Bank as an income of less than $1.90 a day), whereas just 1.8 percent of people in freest economies live in extreme poverty—a figure that is still too high (the optimal number is zero), but vastly better than the level that persists in the least free countries.
Comparing Capitalist and Socialist Economies
Economic measures aside, people living in the most capitalist countries also live on average 14 years longer, have an infant mortality rate six times lower, enjoy greater political and civil liberties, gender equality, and to the extent you can measure such things, greater happiness too—when compared to the least capitalist economies.
Take Hong Kong, for example, which is the world’s freest economy according the EFW report. In 1941, journalist and travel writer Martha Gellhorn visited the city-state with her husband, Ernest Hemmingway and noted “the real Hong Kong…was the most cruel poverty, worse than any I had seen before. Worse still because of an air of eternity; life had always been like this, always would be.” But just a few years after Gellhorn’s visit, the surrender of the Japanese in 1945 meant that British rule returned to the island and with it came a largely laissez-faire approach to the city’s economy.
We should remember; the data simply doesn’t support the anti-capitalists.
In 1950, the average citizen in Hong Kong earned just 36 percent of what the average citizen in the United Kingdom earned. But as Hong Kong embraced economic freedom (according the EFW, Hong Kong has had the most capitalist economy every year bar one since 1970), it became substantially richer. Today, Hong Kong’s GDP per capita is a whooping than 68 percent higher than the UK’s. As Marian Tupy, editor of HumanProgress.org, notes, “the poverty that Gellhorn bemoaned is gone – thanks to economic freedom.”We can see far bigger gaps whenever we pair a broadly capitalist country with an otherwise similar socialist country: Chile vs. Venezuela, West Germany vs. East Germany, South Korea vs. North Korea, Taiwan vs. Maoist China, Costa Rica vs Cuba, and so on. (Yes, I know: none of that was “real” socialism. But then, it always is real socialism, until it isn’t.)
Decrying the ills of capitalism on a placard or in a newspaper headline is a trend with little sign of going away any time soon, but when we see such unsubstantiated claims, we should remember; the data simply doesn’t support the anti-capitalists.
During a recent visit to Toledo, Ohio, to speak at a local school, I saw remarkable signs of an improving economy in this Rust Belt city. My taxi driver from the airport boasted that he could leave his position tomorrow and have his pick of other jobs. The hometown law students with whom I lunched had renewed confidence that they could remain in the area because business was better than at any time in the last two decades. I stayed at a hotel that had opened just weeks earlier, and another, across the street, was scheduled to open this fall.
Toledo’s recovering prosperity is emphatically not a story of the rich getting richer. A driver for hire does not make more than the median income, and the law students were young men graduating from a regional school, not highflyers on their way to Wall Street firms. Nor were the benefits of economic growth merely economic: I could hear in the driver’s voice the sense of autonomy and self-worth that comes from knowing that you can quit today and be employed tomorrow. The law students enjoyed having the choice of staying near friends and family. To be sure, Toledo is still relatively economically distressed, but it’s striking that the dynamism of America’s economic recovery is being felt even here.
Being in Toledo reminded me of something that Robert Lucas, a Nobel Prize winner in economics, said: “Once you start thinking about economic growth, it is hard to think of anything else.” Economic growth compounds, potentially doubling or tripling incomes over a lifetime. Growth also enables nonmaterial opportunities, from changing jobs to sending one’s children to better schools.
It’s distressing, then, that Democrats have given up on economic growth as a central concern. Bill Clinton ran for president on a platform of economic renewal. “It’s the economy, stupid” was a signal that his policies would aim at promoting growth. And his mantra of rewarding people who played by the rules was a nod to the culture of personal responsibility that undergirds growth.
The recent presidential debates reflect a complete reorientation of the Democratic Party—away from growth. Elizabeth Warren was the only candidate to tout a proposal for increasing economic growth—breaking up big companies, particularly tech companies. That idea certainly doesn’t enjoy consensus support from economists, and few see it as a significant spur to growth, in any case; large tech companies have been responsible for much of the increase in GDP over the last decade. They have also provided services—like the ability to search on Google—whose value cannot be captured by conventional growth measures, because they’re free. A few candidates, like Pete Buttigieg, talk about building infrastructure, which could be growth-enhancing. And a third-tier candidate, John Delaney, argued for free trade, a certain promoter of growth.
But the Democratic field’s overwhelming focus has been asset redistribution—providing free health care to all, forgiving student debt, or giving every adult an annual stipend of $12,000. It’s hard to see how these policies could promote growth. They move America toward the welfare states of continental Europe that have economically underperformed the U.S. for decades—and this difference in performance is understated because other nations ride cost-free on our innovations in technology and medicine.
Leading candidates like Warren and Kamala Harris have even suggested that they’re open to packing the Supreme Court. Buttigieg has a detailed plan to change its membership. These are attacks on the rule of law, crucial to economic growth. Confidence in settled rules affecting property and contract give people the confidence to invest and take risks. While it might seem that our modern Court is largely focused on civil rights, economic issues remain salient. Labor and administrative law are contentious matters that bear on economic production, and the takings and contract clauses remain litigated constitutional provisions. An enlarged Court, with justices dedicated to a progressive, rather than a constitutionalist, agenda could undermine the legal basis for American prosperity.
Coastal elites will fare just fine, no matter who is president. In fact, heavier regulation, like that contemplated by the Green New Deal, will help the cognitive elite by requiring companies to hire them to navigate the obstacle course of swelling government. But the loss of focus on economic growth will be disastrous for the American middle, like my new acquaintances in Toledo.
John O. McGinnis is a contributing editor of City Journal and the George C. Dix Professor in Constitutional Law at Northwestern University.
Worry over America’s recent economic stagnation, however justified, shouldn’t obscure the fact that the American economy remains Number One in the world. The United States holds 4.5 percent of the world’s population but produces a staggering 22 percent of the world’s output—a fraction that has remained fairly stable for two decades, despite growing competition from emerging countries. Not only is the American economy the biggest in absolute terms, with a GDP twice the size of China’s; it’s also near the top in per-capita income, currently a bit over $48,000 per year. Only a few small countries blessed with abundant natural resources or a concentration of financial services, such as Norway and Luxembourg, can claim higher averages.
America’s predominance isn’t new; indeed, it has existed since the early nineteenth century. But where did it come from? And is it in danger of disappearing?
By the 1830s, the late British economist Angus Maddison showed, American per-capita income was already the highest in the world. One might suppose that the nation could thank its geographical size and abundance of natural resources for its remarkable wealth. Yet other countries in the nineteenth century—Brazil is a good example—had profuse resources and vast territories but failed to turn them to comparable economic advantage.
A major reason that they failed to compete was their lack of strong intellectual property rights. The U.S. Constitution, by contrast, was the first in history to protect intellectual property rights: it empowered Congress “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” As Thomas Jefferson, who became the first commissioner of the patent office, observed, the absence of accumulated wealth in the new nation meant that its most important economic resource was innovation—and America’s laws encouraged that innovation from the outset. Over two centuries later, the United States has more patents in force—1.8 million—than any other nation (Japan, with 1.2 million, holds second place). America is also the leader in “triadic patents” (that is, those filed in the United States, Europe, and Asia) registered every year—with 13,715 in 2009, the most recent year for which statistics are available, ahead of Japan’s 13,322 and Germany’s 5,764.
Another reason for early American prosperity was that the scarcity of population in a vast territory had pushed labor costs up from the very beginning of the colonial era. By the early nineteenth century, American wages were significantly higher than those in Europe. This meant that landowners, to make a profit, needed high levels of productivity—and that, in turn, meant the mechanization of agriculture, which got under way in America before it did overseas.
The replacement of labor with capital investment helped usher in the American industrial revolution, as the first industrial entrepreneurs took advantage of engineering advances developed in the fields. The southern states made a great economic as well as moral error in deciding to keep exploiting slaves instead of hiring well-paid workers and embracing new engineering technologies. The South started to catch up with the rest of the nation economically only after turning fully to advanced engineering in the 1960s as a response to rising labor costs.
The enormous American territory and the freedom that people had to move and work across it—guilds were nonexistent in the new country—also encouraged an advanced division of labor, which is essential to high productivity, as Adam Smith argued in The Wealth of Nations. And Americans’ mobility had a second benefit: by allowing entrepreneurs and workers to shift from location to location and find the best uses of their talents, it reduced prices, following David Ricardo’s law of comparative advantage. Today, globalization has the same effect, making prices drop by assigning the production of goods to countries that are relatively efficient at making them. But in nineteenth-century America, the effect was concentrated within a single large nation. Both the extended division of labor and the law of comparative advantage reduced prices to a level lower than any seen before, despite America’s high wages.
Democracy, too, encouraged ever-cheaper products. In Europe, an entrepreneur could thrive by serving a limited number of wealthy aristocrats—or even just one, provided that he was a king or a prince. Not so in the democratic United States, where entrepreneurs had to satisfy the needs of a large number of clients who compared prices among various vendors. America’s leading entrepreneurs haven’t always been the greatest innovators, but they have been the greatest cheapeners and tinkerers. Henry Ford didn’t invent the automobile, but he figured out how to make it less expensive—a mass product for a democratic market, at first American and then global.
The ultimate American economic invention was standardization, which further reduced production costs. Standardization evolved in America because consumers there tended to share a taste for the same products and services. Companies consequently began providing similarly priced goods and services of the same general quality to citizens constantly on the move across the American expanse. Not only did Coca-Cola, Hilton hotels, and McDonald’s become successful companies; they became forces for stability in a remarkably mobile society.
Immigration has been another component of American economic dynamism, for evident quantitative reasons: national GDP grows when total population and productivity increase simultaneously. But this effect has worked particularly well in the United States because its immigrants have tended to be young, energetic, and open to American values. Immigration is a self-selecting process: those who find the courage to leave behind their roots, traditions, and family often have an entrepreneurial spirit. (Indeed, prior to the emergence of the modern welfare state, it was tough to survive in America without such a spirit.) The newcomers, from Irish workingmen in the nineteenth century to Russian scientists in the twentieth, have continually reenergized the economy with their skills and knowledge.
They have also added a wild variety to American life, which helps explain why American culture—highbrow or lowbrow, sophisticated or pop—has dominated the world. In the cultural arena, at least, the globalization of the modern world is actually its Americanization. Roughly 80 percent of the movies seen in the world every year, for instance, are produced in the United States. This surely has something to do with the fact that, from the first days of the film industry, Hollywood’s producers and directors hailed from all parts of the globe, intuitively knowing what kind of movies would appeal not just to Americans but to people across the planet.
The entrenched rule of law, the absence of guilds, the unfettered competition, the democratic mass market, the immigration effect— Europeans took little notice of these striking American developments or of the expansion of the American economy generally. Not until the St. Louis World’s Fair in 1904, which brought European business delegations to the United States for the first time, did Europeans understand how far American entrepreneurs had leaped ahead of them. According to Nobel laureate Douglass North, the fair marked a turning point; from then on, the American economy was widely recognized as the global leader in per-capita income and overall output.
The American drive for innovation intensified with the growing cooperation of venture capital, business, and academia in the twentieth century. The defining moment occurred in the 1950s, when Frederick Terman, a dean of engineering at Stanford University, launched the first “industrial park”—a low-rent space where start-up firms could cluster and grow. Built on Stanford’s campus, it remains in existence; many consider it the origin of Silicon Valley. The collaborative “Stanford model” has been a trademark of what New York University economist Paul Romer calls the New Growth, in which the association of capital, labor, and ideas produces economic development. New York City, hoping to spur New Growth, has just awarded Cornell University the right to open an applied-science campus on Roosevelt Island in the East River.
In America, the three-sided nature of modern capitalism—capital, labor, ideas—has given the economy a sharp competitive edge. Other countries have tried to replicate the Stanford model, but they have little to show for it so far, partly because the best American universities have unique advantages in funding and in top research faculty and students. The failure to reproduce the model elsewhere has encouraged widespread infringement of American intellectual property, especially by China (see “Patently American,” Autumn 2011). But piracy, a short-term fix at best, doesn’t foster innovation.
Another ingredient in America’s recent prosperity is the Federal Reserve’s success at maintaining a stable, predictable currency. Thanks to its relative independence from the government, the Fed—except during its brief Keynesian periods, such as the late seventies and the current stimulus era—has been able to protect the dollar from politically expedient inflationary pressure. That has encouraged Americans to invest in production. In parts of Europe, by contrast, a long history of inflation taught residents to grab short-term returns by speculating in money markets. Indeed, private investment is always lower in inflationary countries than in noninflationary ones; think of struggling pre-euro Italy versus booming pre-euro Germany.
The American economy has also been spared the aggressions that anti-capitalist ideologues, both fascist and Marxist, unleashed in Europe. True, Washington has diverged from free-market principles at times, usually by imposing high tariffs on goods at the request of industrial lobbies. But the normal, publicly accepted form of American production has always been free-market capitalism. American investors and entrepreneurs, unlike their European counterparts, have never lived with the fear that the state would nationalize their investments or factories.
The overall level of taxation has remained lower in the United States than in Europe, and this has benefited growth as well. Americans and Europeans spend approximately the same percentage of their incomes on personal consumption, housing, education, health, and retirement. In European countries, though, these expenditures are often funded through taxes; in the United States, they’re more frequently paid for by consumers making free choices. The European redistributionist model leads to a more egalitarian society, while the American model is based on the individual’s assumed capacity to make decisions that are right for him. The proper balance between equality and freedom remains the subject of debate between liberals and free-market conservatives. But free choice does appear to be more economically efficient: as economists like Nobel laureate Gary Becker have shown, individual investments tend to be made more rationally than collective, government-directed investments. And when public expenditure grows, it may reduce the share of private investment and diminish what another Nobel economist, Columbia University’s Edmund Phelps, calls the dynamism of an economy.
Does this claim apply even to long-term investments traditionally made by the government, such as infrastructure? Was the Eisenhower administration’s decision to fund an interstate highway network a more rational investment than the creation of such a network through private funding would have been? No one can know for sure. In statist France, it’s worth noting, the freeway system is privately run, funded by tolls, and in better condition than its American counterpart. In any case, to argue that more public spending would accelerate American economic growth is to ignore the fact that all major European nations have higher levels of public spending than the United States does—and that all are poorer.
A final reason for American prosperity involves what Joseph Schumpeter called “creative destruction.” As he explained the concept in his 1942 book Capitalism, Socialism and Democracy, for economic progress to occur, obsolete activities and technologies must disappear (the destruction), and capital must shift from old uses to more productive ones (the creation). Government efforts to save or bail out companies that stick with outmoded products, services, or management methods protect the existing order at the expense of innovation, growth, and future jobs. European governments resist creative destruction by means of extensive labor regulations, which economists blame for the fact that over the long term, unemployment has been higher in Europe than in the United States. Slower growth rates don’t account for this difference: in fact, the European economy has at times grown faster than the American one. Of course, endorsing creative destruction doesn’t mean abandoning workers displaced by this harsh process—and the American safety net, while much criticized in Europe and far from perfect, has provided extended unemployment insurance for millions seeking work.
Fixing an ailing economy can be difficult in a democracy. Politicians running for office, pundits, and incumbent administrations will always be tempted to promote quick fixes, which aren’t really fixes at all. Indeed, as history shows, many popular responses to economic crises—closing borders to immigration and free trade, hiking taxes, or printing money excessively and driving up inflation—can do incredible damage to long-term growth.
In the current sluggish economic environment, the remarkable history of American dynamism is thus more instructive than ever. America’s economic might is rooted in an entrepreneurial culture and a passion for innovation and risk-taking, traits nourished by the nation’s commitment to the rule of law, property rights, and a predictable set of tax and regulatory policies. Policymakers have lost sight of these fundamental principles in recent years. The next era of American prosperity will be hastened when they return to them.
Guy Sorman is the author of Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis.
We believe in a well-funded government, and we understand it is our duty to pay our fair share of taxes. And we do. Some of our financially successful colleagues call themselves “patriotic millionaires” and wish to pay more taxes to the government. We tip our hats to them and hope they write big checks to the Treasury, which accepts voluntary donations.
Yet we oppose higher taxes on “the rich,” for two practical reasons. First, the evidence is clear that higher tax rates would hurt the global competitiveness of the American economy, and thus hurt all Americans. One of us lives in Florida, where there is no state income tax; the other in New York City, with the highest income taxes in the country. The Empire State is struggling compared with other states; the Sunshine State is booming.
More important, we know we can spend our dollars more wisely, and in ways that benefit our communities and our country, than politicians can.
The businesses we created have employed hundreds of thousands of Americans. Two of the firms we own we purchased in bankruptcy court, saving more than 5,000 jobs. Our companies have paid tens of billions of dollars in wages and contributed hundreds of billions to U.S. gross domestic product. They also made the tens of millions of Americans who use our products and services better off. The Home Depot lowered hardware prices across the country. Customers chose us because we offered what they wanted at a price they were willing to pay. That’s the win-win miracle of the free market.
We continually plow most of our earnings back into the enterprises and charities we support, built, own or operate. Our businesses in particular are our legacies, and our greatest passion is to ensure that they keep growing and innovating for decades beyond our lifetimes. Every additional dollar the government takes from us is a dollar less for this critical process of expanding America’s wealth and job-creating businesses.
We also have given more than $2 billion to charity—causes ranging from the American Cancer Society to the Salvation Army, from museums and operas to veterans programs, homeless assistance and private schools in inner cities for at-risk kids.
When we look at the way government spends its money, we are frustrated by the waste and the ineffectiveness of so many of its programs, however well-intentioned. The projects we fund of our own accord deliver real bang for the buck. The schools to which we donate teach kids better than many rural and inner-city government-run ones do. Our enterprises better promote values associated with virtue and success, and they are helping cure terrible and painful diseases from cancer to multiple sclerosis.
We are forever grateful to live in a nation that promotes free enterprise, which enabled us to achieve our dreams. Both of us are sons of immigrants who came to these shores with almost nothing. No one would ever say we grew up privileged—and that is true of most other highly successful business owners we know. We made it the old-fashioned way: We had bold plans, we took big risks, and we built and invested in highly successful made-in-America businesses.
Our greatest hope for our country is that others have the opportunities we had. We are profoundly troubled by the obstacles that many millions of young Americans face today—poor schools, drugs, single parent homes, discrimination, broken and dangerous communities.
Our patriotism is measured not in how much we pay in taxes—which is a lot—but in the businesses and the wealth and the jobs we create. We wish Washington would focus on advancing policies that will allow millions of others to experience the American Dream—as we have.
Mr. Marcus is chairman of the Marcus Foundation and the Job Creators Network and retired co-founder of The Home Depot. Mr. Catsimatidis is honorary chairman of the Committee to Unleash Prosperity and owner of Red Apple Group.
This article appeared August 13, 2019 in wsj.com.
West Virginia Senator Robert Byrd died in 2010 as the longest serving U.S. senator of all time. While in office, Byrd predictably amassed enormous power such that he was able to shower West Virginia’s citizenry with all manner of government largess.
Evidence of Byrd’s generosity with the money of others is all over the state. There’s the Robert C. Byrd Highway System, the Robert C. Byrd Bridge, the Robert C. Byrd Expressway, the Robert C. Byrd Federal Building, the Robert C. Byrd Health and Wellness Center, the Robert C. Byrd Institute for Advanced Flexible Manufacturing Systems, along with countless schools, service centers, rest stops on West Virginia highways, etc. Byrd delivered copious amounts of federal spending to the state, but did not deliver prosperity. West Virginia remains one of the U.S.’s poorest states, and is a monument to the flawed thinking popular among pundits, economists and politicians that says government spending boosts economic growth. No, it doesn’t. Wealth and capital goods follow talent, which means tens of billions were consumed in West Virginia only for the proceeds to exit the state as its best and brightest have been doing for decades.
Byrd’s failure to deliver his state from endless stagnation came to mind while reading a recent piece by Atlantic staff writer Derek Thompson. Writing about a Trump economic outlook that he asserts neither side will defend, Thompson claims Republicans don’t want to talk up the economy because they “don’t like to admit the biggest policy-based reason why the economy surged in 2018 and into 2019, which is this: President Donald Trump secured the very stimulus that Republicans spent years denying President Obama.” No, that’s not a serious view.
But then Keynesians don’t even bother to try to be serious anymore. Having had their analyses so thoroughly warped by groupthink for the longest time (Keynes himself, as he neared his own end, referred to his many disciples as “those fools”), they’re no longer capable of constructing reasonable arguments. None dare say it since pundits on both sides increasingly buy into the laughable notion that government consumption powers growth, but Keynesians are the modern flat earthers.
Really, where does one begin? Implicit in Thompson’s thesis is that absent government spending, capital just sits idle. That’s not true, though it’s not Thompson’s fault for not knowing it’s not true. Most economics professors are Keynesians too such that they cheer government consumption of wealth always and everywhere created outside government. Thompson is plainly well taught, and that’s the problem. Again, there’s no such thing as idle wealth or idle money. Banks and brokerages don’t take in unspent wealth only to stare lovingly at it, rather they immediately put it to work. For them to sit on it as Thompson plainly imagines they do (hence his support of government spending to make up for alleged private sector parsimony) would be for them to bring on rapid insolvency. This statement of the obvious rates mention given Thompson’s belief that consumption is the driver of growth. It isn’t, but even if it were, no act of saving – short of stuffing money under a mattress – ever subtracts from or delays consumption. To save is for one to shift consumptive ability to others. Or better yet, to shift resource access (investment) to others with an eye on future returns.
Thompson’s surely well-meaning guess as to what instigates economic growth comes up short, but it’s hard to fault the youthful writer too much for taking extra good notes in class. Academics believe consumption powers economic growth, and by extension so does Thompson. The credentialed (and the journalists who hang on their every word) don’t understand that consumption is what happens after production. Always. Figure that we all have endless consumptive desires, which means no government need consume for us. What limits our consumption isn’t a lack of desire as much as it’s a lack of investment. Investment is what makes it possible for us to produce more and more in less and less time. It’s called productivity. Investment boosts productivity, which is what economic growth is. Consumption doesn’t boost economic growth as Thompson presumes, rather it’s a consequence of it.
But since Thompson believes consumption is the source of output, it’s only natural that he would believe government waste during the Trump years would be the cause of growth. Implicit in what’s absurd is that Nancy Pelosi and Mitch McConnell are better allocators of precious resources than are Peter Thiel and Jeff Bezos. No, that too isn’t serious.
Thompson’s analysis ignores why money is so much more meaningful to progress when in the hands of Bezos: he grows through constant failure. By his own admission, he’s spent many billions on failed ideas. And that’s the point. Bezos is a feverish experimenter with a focus on figuring out what works, but even his failures aren’t problematic. Bezos emerges from them much the wiser. Not so government simply because government never has to realize its blunders.
Government spending, and this includes federal spending, is often relentless spending on what’s already revealed itself as unwise. Basically it’s waste of the West Virginia variety over and over again. Precious resources mis-allocated by politicians who don’t have to abide market discipline. They have taxpayers that they can regularly return to and who face jail time if they don’t hand over their income to them, while private sector players recognize that the supply of capital available to them is the opposite of endless. To keep investing they must allocate resources properly. Not so politicians.
Taking this further, Thompson’s belief that government spending has enhanced modern production would cause the most crooked of accountants to blush. It’s double counting of the most obvious kind. Governments can only spend insofar as the private sector is producing taxable wealth for them to spend. Translated, the economic growth that Thompson thinks results from government spending has in fact already occurred. That’s what enabled the spending. Get it? Implicit in Thompson’s worldview is that government spending in Peru, Haiti and El Salvador is a fraction of what is spent stateside solely because the politicians in those countries are less enlightened, and presumably less Keynesian. No, economic growth is slight in each country which means tax receipts and the ability to borrow against future tax receipts is highly limited because of a lack of economic growth. Though he aimed to make a bigger – and correct – point about how full of it both sides are, Thompson’s attempt at correlation is entirely backwards.
To believe his analysis, the former Soviet Union ran out of resources to support its bankrupt regime because it didn’t boost the economy enough with lavish spending. Actually, the collectivist policies were the reason Soviet officialdom had so little to spend. Readers get the picture. Thompson eventually will.
In Thompson’s defense, many Republicans (this likely includes the occupant of the White House) believe as he does that government spending is the spark that ignites economic growth. No, government spending is an effect of growth. Thompson put pen to paper with an eye on getting in a clever dig at the Trump economy, but all he really succeeded in doing was to remind the mildly sapient that Keynesians are the flat-earthers of modern times.
John Tamny is editor of RealClearMarkets, where this article first appeared.
When the 21st century began, “internet cafes” were a thing. Hard as it may be for some to imagine now, bricks and mortar businesses existed into which individuals would enter with an eye on renting both a laptop and internet time.
The subsequent explosion of Wi-Fi and smartphone usage quickly rendered the internet café of the early 2000s unnecessary in short order. What was once a growing sector of the U.S. economy quickly fell into a major recession, only to disappear altogether.
This small piece of business history rates mention in consideration of the bipartisan belief that the Federal Reserve must act fast to allegedly stave off recession. As a New York Times editorial put it last week, “the argument for a rate cut is that the Fed should try to extend this economic expansion, which is now the longest period of uninterrupted growth in American history.” On the right, myriad arguments have been made (including by President Trump himself) that the Fed’s supposed “tight” monetary policy is the source of slower growth, and that rate cuts are necessary to extend the boom.
Translated to readers, left and right are both saying “you didn’t build that,” that the economy is reliant on the Fed’s ongoing fine-tuning via rate machinations. It’s easy to see why the left would take potshots at the most dynamic economy in the world, but it’s more than odd to see Trump and so many Trump partisans make such a weird case.
But first, it’s useful to backtrack. Recessions are painful, which is a statement of the obvious. At the same time, economies aren’t some blob that can be massaged. Economies are just people. During recessionary periods many people realize errors; hiring mistakes, bad habits developed, lousy investments – the list is long.
Somewhere around 2005 investors started to realize that their investments in internet cafes were set to be exposed as foolhardy by market forces. No doubt recognition of the errors was painful, but it also drove progress.
Which raises questions about fighting recessions? Have left and right lost their collective mind? If we ignore that there’s nothing about “growth” in the Constitution, and if we ignore just how overstated is the Fed’s ability to influence the economy as is (more on that in a bit), why on earth would both sides cheer on the fighting of recession or slower growth? Implicit in their extraordinary emotion is that the Federal Reserve should use its powers to help individuals, businesses and investors to delay correction of what’s not working. Translated, left and right are clamoring for stagnation.
After that, can we at least try to be serious about the Fed as “recession fighter”? It’s repeated regularly in this column that the Fed channels its way overstated influence through a U.S. banking system that is increasingly small as a percentage of total credit. To believe that the Fed and the banks it supposedly liquefies can boost overall economic growth is the equivalent of the federal government offering up a big loan to ABC, CBS and NBC in order to boost the television economy. Ok, but so much of the television we watch nowadays has little to do with the Big Three. The Fed is influencing what is small, and shrinking.
Taking this further, banks nowadays pay how much for deposits? At this point readers might check to see what they’re earning on their money market and savings accounts parked at banks. 2 or 2 ½%? Whatever the number, it is low. What that should tell anyone with a pulse is that the banks the Fed projects its influence through are being more than conservative at the moment with money in their control. If not, as in if they were taking big risks, they would be paying much more in pursuit of savers. That’s all well and good that banks are being careful, they must be conservative with monies in their care since they’re lending in order to earn income streams on loans made prudently, but it’s a reminder that banks have little to do with the growth of the most dynamic economy on earth.
In short, even if the Fed could or can liquefy banks, the act of doing so is superfluous. More specifically, there are already big pools of money out there eager to be directed toward the kind of lending done by banks. Assuming the Fed weren’t eager to liquefy them via lower rates, it’s no reach to say that well-run banks with good lending prospects toward the bluest of blue chip borrowers could easily expand their lending capacity in the markets themselves. Basically banks don’t need the Fed to enable the conservative allocation of money exchangeable for resources. Stating what should be obvious, if the economy is weak then conservative banks won’t revive it.
More on resources, it’s shooting fish in a crowded barrel to say that the Fed cannot create the resources that people and businesses borrow money to attain. This is worth repeating again and again amid all the hysteria about the Fed pursuing “monetary ease” to allegedly stimulate the economy. The Fed can do no such thing. We borrow money for what it can be exchanged for. Money itself is a non sequitur of the highest order absent goods to exchange it for. It’s just a reminder that borrowing can’t be stimulated by the Fed. Production is what always and everywhere precedes borrowing. That’s why it’s so disturbing to see so many supply-siders cheer on so-called Fed ease. Such cheerleading refutes Say’s Law. Production first, then consumption. Just the same, production first, then borrowing. Production is what enables borrowing, not price controls that supply siders have historically rejected.
Oh well, the Fed can’t alter reality. It can’t simply because just as investment powers economic growth, so does realization of error on the part of investors render credit tighter. Painful as the latter is, it’s necessary. Think internet cafes. Alleged Fed “ease” thankfully won’t perpetuate today’s equivalent of the internet café, or anything else presently being rejected in the marketplace. Thank goodness.
The main thing is that what stimulates economic growth isn’t central bankers, but instead great ideas brought to the market by great people, only for what’s great to be matched with intrepid capital. It’s a beautiful thing, but decidedly something that cannot be centrally planned, or made to happen cheaply through rate machinations by central banks. The left perhaps have never understood this (see their worship of government planning of economic outcomes), the right used to understand it, but now doesn’t. Next up surely has to be Trump channeling Richard Nixon with “We’re all central planners now!” That’s too bad.
John Tamny is editor of RealClearMarkets, and Director of the Center for Economic Freedom at FreedomWorks.
Democracies are much richer than non-democracies and their wealth has made them the envy of the world. The close correlation between democracy, high GDP per capita, and economic, military, and cultural power has made modernity appear to be a package deal. When people look at rich, powerful countries they typically see a democracy and they think, “I want that.”
At the same time, however, the academic literature on the causal effect of democracy on growth has shown at best weak results. Here is the all-star team of Acemoglu, Naidu, Restrepo, and Robinson (ungated) in the JPE summarizing:
With the spectacular economic growth under nondemocracy in China, the eclipse of the Arab Spring, and the recent rise of populist politics in Europe and the United States, the view that democratic institutions are at best irrelevant and at worst a hindrance for economic growth has become increasingly popular in both academia and policy discourse. For example, the prominent New York Times columnist Tom Friedman (2009) argues that “one-party non democracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. ”Robert Barro (1997, 1) states this view even more boldly: “More political rights do not have an effect on growth.”
Although some recent contributions estimate a positive effect of democracy on growth, the pessimistic view of the economic implications of democracy is still widely shared. From their review of the academic literature until the mid-2000s, Gerring et al. (2005, 323) conclude that “the net effect of democracy on growth performance cross-nationally over the last five decades is negative or null.”
Acemoglu et al. continue, “In this paper, we challenge this view.” Indeed, using a multitude of sophisticated econometric strategies, Acemoglu et al. conclude “Democracy Does Cause Growth.” In their sample of 175 countries from 1960 to 2010, Acemoglu et al. find that democracies have a GDP per-capita about four times higher than nondemocracies ($2074 v. $8149). (This is uncorrected for time or other factors.) But how much of this difference is explained by democracy? Hardly any. Acemoglu et al. write:
Our estimates imply that a country that transitions from nondemocracy to democracy achieves about 20 percent higher GDP per capita in the next 25 years than a country that remains a nondemocracy.
In other words, if the average nondemocracy in their sample had transitioned to a democracy its GDP per capita would have increased from $2074 to $2489 in 25 years (i.e. this is the causal effect of democracy, ignoring other factors changing over time). Twenty percent is better than nothing and better than dictatorship but it’s weak tea. GDP per capita in the United States is about 20% higher than in Sweden, Denmark or Germany and 40% higher than in France but I don’t see a big demand in those countries to adopt US practices. Indeed, quite the opposite! If we want countries to adopt democracy, twenty percent higher GDP in 25 years is not a big carrot.
As someone who favors democracy as a limit on government abuse, I find this worrying. One optimistic response is that the nondemocracies that adopt the policies necessary to make a nation rich, such as support for property rights, open markets and the free exchange of ideas, may not be such bad places. These beasts, however, appear to be rare. But if they are truly rare there must be more to the democracy-GDP per capita correlation than Acemoglu et al. estimate. So what are they missing? I am uncertain.
If democracies don’t substantially increase growth, why are they rich? Acemoglu et al. don’t spend time on this question but the answer appears to be reverse causality (from wealth to democracy) and the fact that today’s rich democracies adopted capitalism early. But don’t expect the wealth to democracy link to be everywhere and always true, it’s culturally and historically bound. And catch-up is eliminating the benefits of the head start.
If much of the allure of democracy has been higher GDP per capita then the allure has been a mistake of confusing correlation for causation. A fortunate mistake but a mistake. The literature on democracy and growth implies that there is no reason to reject an alternative history in which the world’s leading industrial economy was a nondemocracy. Nor why we could not see some very rich nondemocracies in the future–nondemocracies that would be as on par with the United States as say Sweden, Denmark and Germany are today. If that happens, the case for democracy will look very much weaker than it does now as the correlation between democracy and wealth will be broken and the causal effect more evident even to those without sophisticated econometrics.
Though politicians and economists continue to presume otherwise, money is a veil. Changes in its value cannot change the real price of anything. That’s one of many reasons why the devaluation so routinely cheered by politicians and economists brings certain pain beyond the loss of purchasing power for everyone who is paid in the devalued currency.
Considering the dollar, when Treasury makes devaluation its policy, it’s explicitly shrinking what the dollar can command in the marketplace. This harms typical earners, but also corporations when it’s remembered that global cooperation is required for the production of anything, including the prosaic pencil. If the currency is debased, imported inputs increase in currency cost, thus erasing any supposed “export advantage.”
But the much bigger story concerns investment. Stating the obvious, investment, not currency devaluation, is what renders businesses most competitive globally. Investment is the failure-laden process whereby businesses learn what does and doesn’t work when it comes to producing more and more goods and services with fewer and fewer hands. Investment is expensive precisely because it generates so many proverbial dry holes. But there’s no progress without those dry holes, which speaks to the horrors of devaluation.
Specifically, investors who invest dollars in intrepid fashion hope to achieve impressive dollar-based returns in the future. More on this in a bit, but when it’s understood how investors seek returns in currency, it’s hopefully understood that devaluation exists as a horrid tax on investment. Why put money to work if the exchangeable value of future (if any) monetary returns is being shrunken by monetary authorities?
Yet economists say devaluations make country economies more competitive. Yes, economists believe what is absurd. Let’s just say that this near monolithic view within economics says a lot about the economics profession, and very little about prosperity other than how to shrink it.
Which brings us to Facebook’s recently announced crypto or private currency, the Libra. Time will tell, but currency types may look back on this development as the beginning of something much bigger.
It could be simply because no one trades money. Please read on. With trade it’s always and everywhere products for products. We can’t eat money or sleep with it, rather we can just hope that “money” will maintain its reputation in the marketplace so that it’s exchangeable for something else.
I make bread, I want the vintner’s wine, but the vintner looks longingly at the butcher’s meat. Money can’t alter the terms of trade for the three producers mentioned as much as it, in its proper form, is an agreement about value that facilitates exchange among producers with varying wants.
Crucial here is that producers logically don’t want to exchange their real production for money that floats around in value. To do so would be for a producer to occasionally get ripped off, or alternatively, for the buyer to be ripped off. With money that’s no longer an agreement about value top of mind, is it any surprise that trade disputes among countries have soared since the 1970s when money’s (specifically the dollar to which global currencies were pegged) commodity link was severed?
That’s what’s so intriguing about the Libra. Facebook seems to be acknowledging that floating money can’t as effectively serve its sole purpose as a medium of exchange precisely because its value is a moving target. Let’s once again never forget that it’s products we’re exchanging, not money. So long as the currency varies in terms of value, losers are needlessly created even though trade is all about both sides entering a transaction in order to improve themselves. Similarly, and when money floats, losers are needlessly created with the investment process as investors get back soggy dollars, or those invested in give up more of what they’ve created thanks to monetary uncertainty.
Facebook’s answer is pegging the Libra to a basket of currencies. That it’s doing so is very important in consideration of the company’s implicit acknowledgment that money isn’t very useful if its value is once again indeterminate. At the same time, there are obvious problems with the currency basket peg. For one, all major currencies float today. For two, despite the dollar’s own unfortunate volatility since the ‘70s, it remains the world’s currency. Every other currency has at least a vague peg to the greenback, and in some instances an explicit one. Translated, the Libra likely won’t get too much of a stability advantage from its basket peg. Better yet, the only peg that matters is the one to the currency that factors into just about every global trade. And the dollar’s value is very much a moving target.
But that’s nitpicking at this point. To see why, let me offer you 1 bitcoin per month over the next year – 12 in total – to remodel my kitchen. Your response will logically be “which Bitcoin? The one that traded for $5,000 a month or two ago, the one that trades for $9,000 at present, the one exchangeable for under $1,000 a few years ago, or the one that fetched $22,000 in early 2018?” Since Bitcoin has no peg, it’s not very useful as a currency except for in the most short-term of transactions. Facebook should be cheered for once again acknowledging the importance of stability.
Will it succeed? It’s hard to know. Exciting is that given the global nature of the Facebook brand, it’s not unreasonable to foresee a future in which Libra is an increasingly accepted and circulated medium of exchange. Even better would be if Facebook eventually jettisoned floating money for currency definers known for even greater stability. One can dream.
Still, Facebook’s announcement speaks to progress about private measures used to facilitate exchange, along with acknowledgment that money is best and most circulated when its value is broadly agreed to thanks to stability of the value. The Libra has the potential to mark the start of something because if widely used, it will open the eyes of the global population to a truth about money: it works best when its value is stable, plus it needn’t be a government creation.
A version of this piece ran at Forbes.
John Tamny is editor of RealClearMarkets. A version of this piece ran at Forbes.com.
The principles of economic thought tell us that investments would flow to places with less capital accumulation, the reason being is that there would be less competition, thus a higher rate of return on investments. Indeed, as Adam Smith noted in the Wealth of Nations, capital accumulation would be the inevitable hindrance to economic growth.
However, this not as we have it in the real world. Many countries, especially those in the Global South, have very little capital, but yet aren’t flooded with investments. The reason for this is simple: there is no assurance that their property and investment would be protected by the law.
Picture this, why would someone invest in a piece of property, plot of land, or share in a business when there is a high probability that a random bandit, even worse, the government, could steal it at any time without assurance of compensation? This is certainly the norm in many authoritarian countries. For example, a report from the Business Anti-corruption Portal described the police in Nigeria “as the most corrupt institution in the country”, as they often impede on businesses and act above the law. If a country wants to attract foreign direct and portfolio investments, there ought to be a framework that holds people accountable to the arbitrary use of force: this is the rule of law.
This also goes hand-in-hand with property rights since the rule of law is the necessary condition under which property rights can be successfully employed. Indeed, as James Robinson points out in his essay, “Property Rights and African Poverty,” the lack of property rights has been the number one obstacle to economic prosperity in Sub-Saharan Africa. This is contrary to most prevalent views which blame the legacies of colonization and also the geographical location of sub-Saharan Africa to its economic shortcomings.
In addition, most of these countries are filled with an abundance of natural resources — for or example the diamonds in Congo, gold in Ghana, and oil in Nigeria — but yet are not flooded with investments. Some commentators have called this phenomenon the “resource curse.” This occurs when governments focus solely on natural resources as a means to get revenue while ignoring other parts of the economy, consequently making the country worse off as a whole.
Although there is some truth in this statement, the fact that these countries don’t possess or uphold a framework of laws which protect persons and property from arbitrary government interference is still the key explanation to this problem. As Thomas Sowell puts it brilliantly in his book, Basic Economics, “ Countries whose governments are ineffectual, arbitrary, or thoroughly corrupt can remain poor despite the abundance of natural resources, because neither foreign nor domestic entrepreneurs want to risk the kinds of large investments which are required to develop natural resources into finished products that raise the general standard of living.”
On the other hand, we could take a country, Hong Kong, which does not have an abundance of natural resources, but has been flooded with capital in recent times. Furthermore, Hong Kong has been continuously ranked as one of the freest places in terms of economic freedom by think-tanks such as the Fraser Institute and the Heritage Foundation.
What is also fascinating about Hong Kong is the pace upon which their rapid development occurred. The late economist, Milton Friedman, noted that “from 1960 to 1996, Hong Kong’s per capita income rose from about one-quarter of Britain’s to more than a third larger than Britain’s.”
What was undeniably the catalyst for this economic development was the establishment of the rule of law and property rights. Friedman, who had been studying Hong Kong since the 1950s, said that unlike other nations like India who looked to socialism as a model for economic development, Hong Kong, under the influence of John Cowperthwaite, a “disciple of Adam Smith”, pursued laissez-faire economics which included respect for property rights, free trade, and low taxes.
Moreover, countries in Sub-Saharan Africa that are starting to get some transaction in terms of foreign investments — for example Botswana and Ghana — tend to have relatively stable elections, accountable officials, and freer markets compared to other African nations.
Incidentally, as Thomas Sowell observed in his book, Intellectuals and Race, it is not uncommon for less-economically developed countries to target successful expatriate populations—dubbed “Middlemen Minorities”—and use their success as a reason for their country’s failures. This has been seen with the Chinese in Southeast Asia, Lebanese in West Africa, Indians in East Africa, and the Jews in Eastern Europe. This is extremely counterproductive in fostering economic growth, and has often had devastating repercussions as exemplified by the collapse of the Ugandan economy when the Indians were expelled in the 1970s.
It is fair to say that concepts like the rule of law and property rights are not innate to any civilization; indeed, countries like the United States and Britain, which we could say have civil institutions, underwent violent revolutions in order to put these principles in place. This is not to say that current less-economically developed countries need to follow a similar path. Needless to say, there is a need to change the intellectual climate in these nations. This could be done by being less dependent on foreign aid, imposing checks and balances on politicians, and implementing free-market economic policies such as free trade and lower taxes.
Kaycee Ikeonu is an undergraduate student at the University of Victoria in Canada where he studies political science and economics.
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