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Bringing the Moral Case for Free Enterprise Abroad

So far we’ve focused on bringing the moral case for free enterprise to America – where it’s desperately needed – but it’s important not to forget that the human flourishing brought by earned success matters across the globe. Thanks to free enterprise, the percentage of the world’s population living on less than a dollar a day (a traditional measure of poverty used by development economists) has decreased by over 80% since 1980.

But this isn’t good enough. We must continue to lift up the poor in areas struggling to realize the benefits of free enterprise. One of these areas is India. Though for a long time many economists considered India’s future promising, it now runs the risk of a credit downgrade. Economic growth has dropped. So the pivotal question is, as my AEI colleague Sadanand Dhume writes in yesterday’s “Wall Street Journal,” “how should reforms be packaged in a country where about a third of the population lives on less than $1.25 a day?”

Not surprisingly, his answer is the same as my answer for America: through moral language. He says:

Reformers can’t afford to cede the language of poverty eradication to their opponents. Reforms in India make sense not because they place more Indian billionaires on Forbes magazine’s rich list, but because only faster growth can pull millions into the middle class. According to World Bank estimates, high growth rates reduced the percentage of India’s population living in poverty to 33% in 2010 from 42% in 2005. Without reforms this progress will sputter.

There’s also no evidence that Indian voters care particularly about concerns like inequality that leftists regularly tout. This is why Communist parties have been confined historically to two states—Kerala and West Bengal. Passers-by from the slums of Mumbai gather outside Reliance Industries’ chief Mukesh Ambani’s $1 billion home to gawk admiringly, not to throw rocks. For most people, what matters is a chance to live productively, and that their children’s lives are better than theirs.

What prevents politicians from explaining pro-market arguments is a failure of imagination and courage. Why not oppose the Congress Party’s flagship rural jobs scheme by pointing out that it’s unproductive and riddled with graft? A smart politician can make a moral case that New Delhi shouldn’t pour billions into loss-making Air India that could be put to better use building schools and roads. Yet it’s commonplace for even the smartest in parliament to spout the language of sops and benefits.

From the Road

We’re over twenty events into The Road to Freedom book tour, and so far it’s been an incredibly interesting and informative experience. It’s always nice to leave the isolated enclave of Washington, DC, and travel to America.

One of the highlights of these trips is being able to meet with representatives from state government, employees of state-based think tanks, or local business owners. Each state I’ve traveled to is grappling with different issues, some of them dire. In the last two weeks, I’ve visited Texas, California, and Illinois, three states that differ greatly in their economic outlooks. California and Illinois are faced with severe budgetary woes. With constitutional requirements to balance their budgets, the governors and legislators have to make tough decisions. Many of my AEI colleagues are offering helpful solutions, such as Alex Brill’s ideas on ways to cut Medicaid by improving patient outcomes and reducing hospitalization, and Andrew Biggs’s thoughts on how to reform public sector pensions to encourage ownership and ensure future benefits can be paid. Solutions like these can’t come fast enough – as Alex points out, Illinois faced a $2 billion shortfall in Medicaid last year. And the budget crises in these states are leading to outmigration – according to ALEC’s most recent edition of “Rich States, Poor States,” Illinois and California ranked 48th and 49th respectively for net domestic migration.

Texas is a different story, ranking 2nd in net migration. According to the ALEC report, “businesses in California, Illinois, and other high tax states are looking to Texas as a place to call home, and many businesses have already made the move.” Texas gained four congressional seats in 2010. Fortunately, as AEI’s Michael Barone points out, America looks a lot more like Texas than California.

It’s certainly not too late for smart, innovative solutions. Check out the work of the Texas Public Policy Foundation, the Pacific Research Institute, and the Illinois Policy Institute if you’re interested in their analyses and solutions for their states.

 

Solutions for Our Failing Tax Code

My AEI colleague Alex Brill testified before the House Committee on Ways and Means this morning on the need to evaluate the expiring tax provisions known as “tax extenders.” He did an excellent job calling attention to one of our nation’s rapidly growing problems. As Brill pointed out, and as you can see in the chart below, the use of tax extenders has grown,  so that in 2001, only 13 were set to expire in 2001 or 2002, but “a decade later, in 2011, 129 tax provisions were set to expire in 2011 or 2012.”

While these temporary provisions are usually created to ensure review of the tax code, they are often renewed without rigorous discussion, and as more are created, the number of expiring provisions grows. Brill correctly highlights four main reasons this creates a problem:

1. Tax extenders distort the fiscal budget baseline, thereby complicating revenue and deficit forecasts…

2. Tax extenders create financial reporting problems for publicly traded companies…

3. Tax extenders exacerbate the uncertainty facing businesses…

4. Tax extenders are intended to ensure oversight, but they are generally extended without much consideration.

As I’ve traveled around the country on the book tour, I’ve heard a number of these concerns echoed by businessmen, particularly surrounding uncertainty creation. It becomes harder and harder to make hiring and other long-term decisions when many budgetary questions remain unanswerable due to short-term provisions. And tax complexity is costly – in 2008, the cost of complying with the individual and corporate income taxes amounted to $163 billion.

Brill argues that each provision should be able to stand on its merit as a sound tax policy that would be effective if permanent. Each extender should then be evaluated and dealt with. These measures would indeed help eradicate the growing problem of extenders. And not a moment to soon, since as AEI’s Jim Pethokoukis points out, the coming tax increase due to expiring provisions is larger than any other previous tax increase, contributing to the coming fiscal cliff, which would have disastrous effects.

You can watch Brill’s full testimony here, and read about other solutions for our ailing tax code from “The Road to Freedom” here.

Is a Wealthy Class Actually Good? Americans Think So.

It’s impossible to escape today’s heated rhetoric regarding “the 1%” in America. If the media hype and Occupy Wall Street are to be believed, America is being held hostage by a group of incredibly wealthy citizens who refuse to pay their fair share in taxes. But what do most Americans really think about wealth?

In the chart below, you can see that the percentage of Americans who believe that the country benefits from having a class of rich people is virtually unchanged from 1990, up 1 percentage point. The reverse belief also held almost steady, moving from 32 percent to 34 percent.

Why is this so? I think it’s because even in today’s America of very polarized discussion, Americans still inherently believe in the American dream, that anyone can work hard and be rewarded. Like I show in “The Road to Freedom,” for the past 40 years, between 60 and 70 percent of Americans have said “hard work” is the primary driver for getting ahead. The belief that “lucky breaks” gets one ahead has never polled higher than 16 percent. And the data show that this belief in work is correct – Americans move between income brackets throughout their lifetimes.

This isn’t to condone all actions of the rich. As my AEI colleague Michael Barone points out, it is certainly possible to use your wealth to buy influence and special favors – just one example being that 71 percent of Energy Department loans have gone to Democratic donors or bundlers since Obama took office (though the Democrats are certainly  not the only guilty party when it comes to rewarding friends). We should work hard to stop special interests and corporations from repeatedly being fed at the government trough. But most people don’t become rich through special interests, and many Americans want to believe that they or their children will receive rewards, including monetary rewards, for their efforts. Our number one goal in America should always be to promote mobility and opportunity rather than redistribution and equalization of outcomes.

Saving Us From the Statist Quo

This past week we’ve seen two great national debates running side-by-side. First, the debate over the role of government that’s been raging since the beginning of the crisis has continued, most recently carried forward by David Brooks. The newer debate focuses on the kind of capitalism we want in America, and has been commented on by many in the last week, including the Post’s Jennifer Rubin and Steven Pearlstein and AEI’s Jonah Goldberg.

Obviously these two debates intersect a great deal – the type of capitalism we want helps answer when and where we should regulate and what type of safety net we should employ. Brooks makes an excellent point in his op-ed about the role of government in the economy:

Does government encourage long-term innovation or leave behind long-term debt for short-term expenditure? Does government nurture an enterprising citizenry, or a secure but less energetic one?

In “The Road to Freedom,” I offer my own take on the role of government:

In his first inaugural address, Thomas Jefferson laid out his vision of “a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government…

What philosophy of government preserves Jefferson’s ethos, while recognizing that the world has changed in dramatic ways? In my view, America would do well to turn to the wisdom of German-born economist and Nobel laureate Friedrich Hayek. Hayek’s classic book The Road to Serfdom, written in 1944, is obligatory reading for all advocates of free enterprise—and still provides an excellent guide to the role of government.

Conservatives admire and quote Hayek incessantly. What’s surprising to some is that he taught that the government, for moral as well as efficiency reasons, can and should provide a minimum basic safety net for citizens. And like most other economists, he also believed it should address “market failures.” But that’s all—and that is dramatically less than what the government currently does.

Check out the role of government in one chart here.

Happy Memorial Day

It’s been a long busy week, speaking in Denver, Los Angeles, and then Salt Lake City. So rather than ending the week before a beautiful three day weekend with a long post on tax policy, I’d like to just offer a thank you to my readers for helping to put “The Road to Freedom” on the New York Times best seller list this week, and thank you for all you are doing to help protect America’s culture of free enterprise.

And also, as someone who fights for our culture in the realm of ideas, I’d like to say a special thanks to those who have actually served and fought for my freedom. I came across this video earlier today telling the story of a nonprofit organization Honor Flight that aims to bring all WWII veterans to their memorial here in DC. I hope you’ll give it a look and also take the time to thank a veteran this weekend.

The Future of Free Enterprise

I’m thrilled to be speaking tonight the Young Americans Center for Financial Education in Denver about “The Road to Freedom.” The Center was founded by Bill Daniels in 1987 to teach kids about free enterprise and financial literacy. It’s truly a special place. As their website notes, research shows that a large number of the population, adults included, are missing many of the skills necessary for basic financial literacy. It’s the Center’s aim to alleviate that through engaging hands-on programs that teach financial self-sufficiency and work and life skills to over 45,000 youth annually.

I can’t stress enough the importance of this mission – to guard America’s culture of free enterprise, we must not only raise each generation with an entrepreneurial spirit, we must teach them the tools they need to be successful. Whether or not these children go on to become business owners, these financial skills will prepare them to be responsible with their future earnings, protecting their families and helping them become more diligent citizens.

In today’s tough climate, young people have an incredibly hard road ahead – high youth unemployment, depressed earnings, and high student loan payments make the future look bleak. Add to that the fact that there is a high national debt bill coming due soon, and it’s easy to see why understanding basic personal finance is imperative for the younger generation. As they try to manage their resources and obligations while also trying to start their lives through marriage and family, they must be equipped to make smart decisions. Centers like Young Americans help answer this problem.

For the rest of us, we need to stop pursuing programs that benefit the middle class while mortgaging our children’s futures. We’re called to protect the opportunity society for future generations, and that means making the tough decisions necessary to reform Social Security, Medicare, and Medicaid so they’re sustainable. It also means dealing with the debt. To see real change, we have to lead with this moral case.

The Human Cost of Over-Regulation

Our friends over at the State Policy Network have an interesting blog piece up on the sufferings of small business under “big regulation.” With all the news these past few weeks over the importance of job creation rather than job destruction, the video interview by NFIB and Small Businesses for Sensible Regulations at the end of the blog serves as a stark reminder — while creative destruction does at times cost jobs as industries transition, the toll of over-regulation can be huge. As SPN notes,

In spite of small businesses’ benefit to the entire economy, they are disproportionately harmed by federal regulations.  According to a SBA report, for firms with fewer than 20 employees, the per employee cost of all major federal regulations was $10,585 per year.  For large firms (greater than 500 employees), the cost was $7,454 per employee per year.

The article goes on to tell that there are “4,128 …  regulations in the pipeline, including 404 which directly impact small businessesand “291,676 …  federal employees creating regulations in FY2012, an increase of 410% since 1960.”

These facts are astounding for a country trying to bring people back into the workforce and jump-start economic growth. While some regulations are necessary to keep America safe and healthy, regulatory overreach is an ever-present threat. Americans can never be free to pursue their happiness and earn their success when regulation becomes too complex and onerous for new business creation. I’m grateful for free enterprise advocates like those at the State Policy Network who help state and local governments understand the scope of regulation and push for a freer, fairer, regulatory structure.

The $41 Cake and Delayed Gratification

There’s an interesting article by Warren Kozak in today’s Wall Street Journal about food stamps. I like it because it does one thing that advocates of free enterprise are often reticent to do: it admits that the safety net is an important feature of American culture. Even Hayek claimed that a nation as rich as America can afford a minimal standard of living for the truly vulnerable and those falling on hard times. But just because the safety net can play an important role for a small portion of the population, there is one thing it should never do — discourage the type of sacrifice and delayed gratification that leads to being able to flourish.

Kozak recounts a trip to his local grocery store in which the customer in front of him purchases a $41 ice cream cake with her benefits card. The shopper’s young son was shocked by the price, which Kozak agrees is a good deal more than he would spend on a cake. The boy’s mother doesn’t answer his concern, and the two leave.  Kozak goes on to wonder what lesson the child took away from the spending. I wonder the same thing.  As Kozak points out, being able to delay gratification is an important part of developing a strong work ethic.

In “The Road to Freedom,” I mention an experiment done with children where the facilitator gives the child a marshmallow and encourages the child to not eat it for 15 minutes. The child will then get a second marshmallow when the facilitator returns. The facilitator then leaves, and the children are left to discipline themselves to get the second treat. Many of the children fail the experiment, but the interesting result comes much later. When the researchers followed up with the children as they finished high school, there was a very clear trend. Those children who had been able to delay gratification and wait for the second marshmallow scored 210 points higher on the SAT and were far likelier to be going to college and not be in any type of legal trouble.

The point is clear: the ability to delay gratification and work for rewards is key. While food stamps are, I feel, an important part of the American safety net, the program is no longer fulfilling its intended purpose. Over the decades, the restrictions on food stamp purchases have been lightened dramatically, so that now even $41 dollar cakes, something a middle class family would be reluctant to buy, are available for purchase.

While we need to protect those falling on hard times, we also must take care to avoid teaching dependence and encouraging behavior that reduces one’s ability to delay gratification and earn success.

The True Pain of Joblessness

We all know we’re experiencing a jobless recovery. Each month we wait for the newest jobs statistics, and their release is immediately followed by numerous analyses of what the number means for the recovery. Frustration with the situation is simmering, causing both the President and his challenger to release different attack ads about their opponent’s job records.

Source: United Technologies/Congressional Connection/National Journal, April 2012.

And why shouldn’t they? This chart from the American says it all. Americans feel the government should be doing more to get people back to work, but no one sees it as likely that they will. My colleague Kevin Hassett explains the truth about the high unemployment rate this way in Sunday’s New York Times:

In 2007, before the Great Recession, people who were looking for work for more than six months — the definition of long-term unemployment — accounted for just 0.8 percent of the labor force. The recession has radically changed this picture. In 2010, the long-term unemployed accounted for 4.2 percent of the work force. That figure would be 50 percent higher if we added the people who gave up looking for work.

Long-term unemployment is experienced disproportionately by the young, the old, the less educated, and African-American and Latino workers.”

As scary as this is, what’s even more frightening is the toll this takes on each unemployed American. Kevin goes on to discuss the long-term implications:

The result is nothing short of a national emergency. Millions of workers have been disconnected from the work force, and possibly even from society. If they are not reconnected, the costs to them and to society will be grim.

Unemployment is almost always a traumatic event, especially for older workers. A paper by the economists Daniel Sullivan and Till von Wachter estimates a 50 to 100 percent increase in death rates for older male workers in the years immediately following a job loss, if they previously had been consistently employed. This higher mortality rate implies that a male worker displaced in midcareer can expect to live about one and a half years less than a worker who keeps his job.”

The causes for this are numerous — prolonged joblessness is associated with serious illness,  psychiatric problems, and suicide. And the negative consequences are passed on to the next generation through an “18 percent increase in the probability of divorce following a husband’s job loss and 13 percent after a wife’s.”

Free enterprise advocates everywhere need to ceaselessly recite this very immoral human tragedy as we advocate for policies that create jobs. And we need to always remember the true purpose behind vocation: earned success. Americans will flourish when we craft policies that get out of the way of entrepreneurs and allow the private sector to once again become America’s main engine of growth.

AEI