“Underlying most arguments against the free market is a lack of belief in freedom itself.” – Milton Friedman
“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” – President Ronald Reagan
“I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” – Milton Friedman
Yesterday I wrote on Why I Support the Carrier Deal – an unusual response from a free markets proponent.
I liked the Carrier Deal because it highlighted the much larger story that lay hidden behind the headlines – as is often the case.
The Carrier deal unto itself was actually small news and would likely have gone unnoticed in differing times. The real story is why United Technologies CEO Greg Hayes came and listened. He came to hear President-Elect Trump’s broader blueprint for our future. He came to hear about plans to reduce taxes, to remove regulations – plans and policies to make the United States a place that attracts, rather than repels, business activity. And that is the real story.
Let’s get a few points out in the open from the start:
Supply Side Economics works – lowering taxes, reduction of governmental burdens and removal of restrictions of any kind. If a business owner faces lower barriers to producing what he produces, he will produce more. If it’s easier to start new businesses, entrepreneurs will start more businesses. Said differently, get government out of the way of the economy and the economy will flourish.
Sticks are ineffective as governmental policy. Carrots are effective as governmental policy. Forcing someone to do something does not work over the long-term (and this was the part of the Carrier Deal I opposed). Creating environments where people want to do something is the way to get results. And that invariably means removing barriers to entry and allowing individuals and businesses the freedom to act.
The Law of Unintended Consequences is a fact of life. Individuals and corporations act when acted upon and generally in their own interest – they adjust their behavior. Often in ways not predicted or planned for. Government policies and regulations prompt individuals and corporations to take actions that were not foreseen by those who enacted the policies and regulations in the first place.
In an earlier commentary I noted the four elements I felt were necessary provisions in order to attract the best and brightest talent.
Purpose. Meaning. Impact. Growth.
These are the tenuous, somewhat intangible, yet all-important needs that drive and motivate all of us in our work and our life. Create an environment where people have the opportunity to attain these four things and you are guaranteed to attract the best of the best.
Create this environment for business and you are guaranteed to create an environment for economic growth. And how do you do this? You move government aside and out of the way. But this is inordinately hard for government to do – it goes against its very nature. And for too long, and in too many ways, we have enabled government in its attempt to pursue a role as economic overseer.
Allow me to pose a simple question.
Do you believe that a politicized governmental entity is the one best suited to make decisions for you and your future – that government would prove to be a smarter and more efficient decision-maker for businesses and the economy than the businesses themselves?
How about our more respected governmental institutions? Well, the Federal Reserve is comprised of highly intelligent and gifted economists, in theory above the political sphere, who are supposed to “guide” our economy and protect it from shocks. And yet, virtually every intervention the Federal Reserve has engaged in has proven to create a bigger problem than the original problem.
Why is this so?
Every difficult situation our economy has faced over the years has been a temporary situation. Every single one. Which creates an inherent conflict in turning to governmental intervention for solutions. Because government programs and interventions always do two things – they lag and they last.
Take, for example, our government’s approach to housing. Most of the federal housing policies were created in response to periods of weak economic conditions – such as recessions, mini-recessions and downturns. However, like all things government, there is a lag effect. And by the time these regulations were put into actual effect, the cyclical downturns they were meant to address had largely already passed – but the regulations stayed in place for decades. This policy error was than compounded and accelerated by an extremely accommodative Federal Reserve which kept interest rates artificially low and monetary policy far too loose which only served to increase the size of the already burgeoning housing bubble – leading us straight into the ’08 financial crisis – a crisis which was then “addressed” by the implementation of the Dodd-Frank legislation. Bad regulation to address the problems created by bad regulation coupled with an overly-aggressive Federal Reserve policy. A circular set of government missteps. Fantastic.
Allow me to state this clearly and loudly: No Central Banker – or any governmental official – is smarter than the market.
Our tax code – both individual and corporate – is also an enormous problem and creates motivations for companies to look abroad. The U.S. marginal corporate tax rate of 39% is the highest of the 34 industrialized nation members of the OECD and the third highest in the world. It is a tax policy that incentivizes companies to engage in inversion – whereby they merge with foreign companies and move their headquarters out of the U.S. to shift their tax base abroad – and keep their cash hoards abroad as well, lest they face higher taxes upon repatriation. There have been recent rulings implemented by the Treasury Department designed to curb some of this activity but more rules are not the solution to the underlying issue – nor will they truly work – recall the Law of Unintended Consequences. The reduction and normalization of our corporate tax rate is the answer. A reduction of this tax would prompt a flood of corporate cash back into our country – and lead corporations to keep their headquarters here. Carrot not stick…
I think President-Elect Trump sees all of this clearly. As part of his 100-Day Plan, Trump has a requirement that “for every new federal regulation, two existing regulations must be eliminated”. Not even the great President Reagan was this directly stated in his aspirations. I’m not convinced this is possible but it is a great approach and a worthy goal. Remember, regulation breeds more regulation. It is like a weed – it must be rooted out before it takes hold. And President-Elect Trump has already proposed lowering the corporate tax rate to 15% as part of his broader tax simplification plan.
It appears to me that Trump may approach our government from a business-like vantage point. I hope he tasks the gifted private sector folks, many of whom are being drawn to government for the very first time, with inspecting and analyzing each governmental department in order to see what can be fixed, what can be cut – and what can be outright killed. For every dead governmental department you can factor in additional GDP growth.
Said more simply, what I saw behind the Carrier Deal was a desire to address the underlying conditions that led Carrier to consider moving a factory to Mexico in the first place – too much regulation and taxes that are too high.
Carrot not stick.
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