Voice For Liberty

Tag: Capitalism

  • Will the real robber barons please stand up?

    By Helen Cochran.

    At the April 13th meeting of the Wichita City Council a request from downtown developer Real Development will be made for an additional $2.2 million taxpayer subsidy for its condo project Exchange Place, located at Douglas and Market. With two weeks to go before this public hearing there is still time for council members to read The Myth of the Robber Barons by Burton Folsom. Folsom’s easy-to-read 134-page narrative lays out the case for entrepreneurship in America and can be read in one evening. It’s a history lesson worth reading by all.

    Folsom highlights two kinds of business developers: “political entrepreneurs” and ‘market entrepreneurs.” And while Folsom focuses on the larger-than-life entrepreneurs of the nineteenth and early twentieth century, the lessons gleaned have far reaching implications and relevance, even on a local level.

    According to Folsom, “political entrepreneurs” are those that seek government/taxpayer subsidy, public private partnerships, protective tariffs, special privileges, etc. Folsom makes a sound case that economic development fueled by political intervention invariably fails and undermines the very ideology it purports to serve.

    On the other hand “market entrepreneurs” are those that obtain their successes by producing a product that is better and of more value to the consumer, unbridled by the government controls and restrictions that come with subsidy. No one can argue that it is the market entrepreneurs that create the wealth in this country.

    Despite the anti-business rhetoric spewed by most historians and reinforced in school curriculums across this country, Folsom offers concrete evidence that the likes of Commodore Vanderbilt, John D Rockefeller, Andrew Mellon, the Scrantons of Pennsylvania, James J. Hill, and Charles Schwab should be revered because of the consumer benefits achieved when free markets are allowed to flourish without government involvement. Folsom contrasts these successes with failure-after-failure of those in the same respective industries that received government subsidy. Government cannot do it better and most certainly cannot do it cheaper.

    In Wichita, Real Development is one of several downtown “political entrepreneurs.” What was originally a $27.8 million project with an approved $9.3 million subsidy from the City of Wichita is now a $51.5 million project seeking an additional $2.2 million subsidy from the City. Real Development boasts that with approved additional City subsidy they will be able to qualify for a $30 million loan from the U.S. Department of Housing and Urban Development — a government guaranteed loan. This “guarantee” is none other than you and me. Our taxpayer dollars are lost if this project fails.

    According to Goody Clancy, the City’s downtown development consultant, there is a market for downtown development in Wichita. Specifically, Goody Clancy consultants found that downtown Wichita demand for residences is 1,000 units over the next five years.

    If such a market truly exists where are the market entrepreneurs and why are they not clamoring to develop? Why are local banks not willing to loan these political entrepreneurs money without a government guarantee? Michael Elzufon, one of the principals of Real Development, states this is a “low risk deal.” Yes, it’s a low risk deal for Elfuzon but I suggest it is a very high-risk deal for the taxpayer.

    The Wichita City Council, as with as many city councils nationwide, continues to insist that economic development in downtown Wichita requires government subsidy. Fear mongering becomes a tactic used when justifying subsidies offered to private enterprise to locate or expand here: “Everyone else is offering them” or “If we don’t subsidize, Company X will go elsewhere or relocate” or “Without subsidy this won’t happen.” Millions of taxpayer dollars have been invested in the name of economic development or downtown revitalization and when projects fail, millions more are spent in an attempt to salvage the project.

    Development succeeds when market entrepreneurs perceive a need and are willing to risk their own capital for success. Anything short of that has historically failed.

    The Myth of the Robber Barons is a must read for anyone interested in the writing on the wall but especially for those with the power to commit taxpayer money to projects that are better left to market entrepreneurs.

  • Stealing Capitalism: The Crime of the Century

    By Jill S. Sprik

    It’s been 105 years since a clandestine plot was hatched to purloin America’s capitalist system and replace it with socialism. Most of us were unaware of what was taking place right under our naïve noses, but recent events have now made it clear. Here’s how it happened:

    Continue reading at Stealing Capitalism: The Crime of the Century.

  • Detroit, corporate welfare and Wichita’s future

    The following op-ed from Americans for Prosperity Foundation’s Alan Cobb appeared in today’s Wichita Eagle (the unedited version is below).

    I agree with Cobb. Wichita definitely has a problem with its economic development strategies. Instead of low taxes that will benefit everyone, the Wichita city council and Wichita city hall bureaucrats insist on dishing out subsidies to companies nearly every week. I’ve shared my ideas with the council in testimony like Wichita universal tax exemption could propel growth and articles like Wichita’s economic development strategy: rent seeking.

    Still, there are some council members who, along with Mayor Carl Brewer and some city staff, feel city the doesn’t have enough “tools in the toolbox” for shoveling incentives on companies for economic development purposes.

    Recently The Eagle printed an article by Molly McMillin, a well-respected aviation and business reporter.

    The question asked throughout the article is one that Wichita leaders and citizens have been asking for some time: What can we do to prevent Wichita from falling into the hole that is Detroit?

    A simple answer is to continue throwing money and other goodies to keep the aviation companies. A better answer is we need to get rid of the notion that our elected officials and others have so much forethought to know what will or won’t be successful in 20 or 50 years. They don’t.

    Detroit became the modern tragedy it is, not just because of global competition, poor products or poor management at the Big Three. Other sectors of the Michigan economy weren’t there to pick up the slack, when the auto industry floundered. Michigan put too much focus on the auto industry, to the detriment of the overall business and economic climate.

    While state and local government poured incentives into the Big Three’s trough, the marginal costs of doing business for everyone else crept up.

    It‘s the classic example of the seen vs. the unseen. We see the new factory Pontiac builds. We don’t see the businesses that reduce their size, close or just move. The irony is we will still see the Pontiac factory after it is closed and boarded up.

    For each tax dollar given to the auto industry, one is taken one away from entrepreneurs trying to create the next GM, Ford, Google or Apple. This may not be too bad the first time or the second time, but over years and decades, the results can be significant. The “next big thing” will be created in a state with a better tax and regulatory climate.

    Cessna, Spirit, Boeing, Learjet and Beechcraft are all great companies that produce great products known throughout the world. Kansans and Wichitans are rightly proud.

    Who can predict with any certainty they’ll be in Wichita or even in business in 10 or 30 years? I hope so, and I think they will, but I am not willing to bet Wichita’s future on it.

    We shouldn’t give other individual companies state or local funded goodies, either.

    Lower the tax rates for everyone. After all, the tax breaks and other prizes handed out are recognition that the cost of doing business in a particular are is too high.

    The Kansas Division of Legislative Post Audit last year reported we spent billions of dollars in “economic development” with literally nothing to show for it. Our lawmakers aren’t very good at picking winners and losers.

    When Wichita’s aircraft leaders were asked about Detroit, there was a golden opportunity to ask other business leaders in Kansas and Wichita that same question.

    It is just as likely and maybe more so, that they will determine if Wichita goes the way of Detroit — or does not.

  • United States Government customer service: think twice

    United States Postal Service: We CareUnited States Postal Service: We Care

    For those who argue that we should turn over more activity — such as health care — to the federal government, take a close look at a government monopoly that’s been around for a long time.

    The United States Postal Service has a monopoly on the delivery of first class mail. As an example of its level of service, consider my bank statement. When it hadn’t arrived by its usual time, I called the bank. The bank assured me it had been mailed.

    Today the statement arrived in a plastic bag explaining that it had been damaged during processing. I can understand that happening once in a while. Machines are not perfect, and sometimes improving their reliability can be very expensive when compared to the benefit received.

    So what was the delay caused by the malfunctioning machine? One day? Two or three days?

    The piece was postmarked February 2. It arrived on February 22. The delay — realizing that mail delivery is not guaranteed — is around 18 days.

    How does a piece of mail being damaged in a machine cause it to be delivered nearly three weeks late? And it’s not bulk or junk mail — my bank statement is first class mail.

    It’s lack of competition. What motivation does the United States Postal Service have to do a better job?

    Think about this as we consider moving activity from the private sector to government.

    A related story from a friend of mine is Postal service?

  • Regulation has not lessened, instead it has harmed us

    Last week’s Wichita Eagle featured an op-ed by Brad Beachy, who is co-chairman of Wichita Democracy for America. Several of the claims made by Beachy deserve examination. In particular, Beachy blames free markets as the cause of our current economic problems: “The Great Recession we’re in now started in late 2007, after several years of deep tax cuts and major repeals of government regulation in the financial market.”

    Let’s look at regulation. Not everyone agrees with Beachy’s claim of major repeals of regulation in recent years. The liberal Time Magazine wrote this assessment of George W. Bush’s regulatory legacy about a year ago:

    The only major piece of regulatory legislation enacted during the Bush years was the Sarbanes-Oxley Act, which dramatically increased regulation of corporate financial disclosures. The really big regulatory changes being pointed to now as possible culprits for the crisis date back to Bush’s predecessors: Bill Clinton, Ronald Reagan, even Jimmy Carter and Gerald Ford. So the popular Democratic refrain that “Bush-era deregulation” is to blame for our troubles is a little hard to square with the evidence. What is true is that most Bush-era financial regulators were less than enthusiastic about the very act of regulating, and that Bush’s “ownership society” push glossed over a lot of potential dangers. Bush didn’t cause the financial regulatory breakdown, but he didn’t jump in to fix it either.

    The housing crisis played a large, perhaps dominant role in the current recession. So let’s look at what were the causes of that to see if deregulation played a role.

    Last October John A. Allison, chairman and former CEO of BB&T Corporation, the nation’s 10th largest financial-holding company, presented a lecture at the 30th annual Economic Outlook Conference at Century II, produced by the Center for Economic Development and Business Research (CEDBR) at Wichita State University. His lecture, titled “The Financial Crisis: Causes and Possible Cures” provided valuable insight into the causes of the problem we’re in.

    Allison said “Only government can make a mistake of this magnitude possible.” Government and its regulators, in this case the Federal Reserve System, the Federal Deposit Insurance Corporation, the housing policymakers Freddie Mac and Fannie Mae, and the Securities and Exchange Commission, were the proximate cause of the problem, and prevented natural market corrective forces to work.

    At the Federal Reserve, management of our nations’ money supply is a problem. “The huge level of federal debt we have today would not be practical if the government did not own the monetary system,” Allison said.

    FDIC insurance of bank deposits leads people to invest in banks without regard to the risk the banks take. It also made the “pick-a-payment” mortgage possible, where each month a homeowner may owe more than the month before.

    Freddie Mac and Fannie Mae exist to promote housing ownership, and they promoted it far above the natural rate of home ownership. Their actions also made the subprime mortgage possible.

    The credit rating agencies sanctioned by the SEC — S&P, Moody’s, and Fitch — are given a monopoly over the issuance of ratings, and they failed in their duty.

    Before the innovations of Freddie Mac and Fannie Mae, savings and loan banks would originate mortgages locally and then hold them locally. Now, the model is “originate and sell,” Allison said. These government regulations made the mortgage broker origination model viable, and led to huge profits, until the bubble burst.

    So when Beachy asks “Why does the unseen hand of the marketplace, in its infinite wisdom, give million-dollar bonuses to the CEOs of mortgage institutions who drive their companies into bankruptcy” we have to answer it’s not the marketplace that did this. It was government policy and regulation, developed over the last few decades, that led to this situation. Our financial system operates in nothing resembling a free market environment.

    By the way, Beachy starts his op-ed questioning the motives of those he criticizes, in this case the Americans For Prosperity Foundation: “Billionaire David H. Koch presides on the foundation’s board of directors and has funded the organization with millions of dollars.” If motives are reason for criticism, we ought to note that Beachy — an employee at a government-owned and run institution — has a self-interest in keeping the government spending gravy train flowing.

  • ‘Economic Freedom and the Wealth and Health of Nations’ lecture to be in Wichita

    Do you know where the United States ranks on the global index of economic freedom? (Hint: It wouldn’t get a medal.) The answer is in the latest edition of the Economic Freedom of the World report.

    Dr. Robert Lawson of Auburn University is co-author of this popular and widely cited report. It evaluates 141 nations and jurisdictions using a combination of economic factors and then creates a ranking from most- to least-economically free. (For an executive summary of the most recent report, visit Economic Freedom of the World 2009 Annual Report.)

    Dr. Lawson will be the guest lecturer at a public forum in Wichita on February 25 at 6:00 pm at the Hyatt Regency Hotel. His presentation, “Economic Freedom and the Wealth and Health of Nations,” is sponsored by the Gilder Lehrman Institute of American History and underwritten by The Fred C. and Mary R. Koch Foundation.

    Because meeting space at the Hyatt is limited, the lecture sponsors ask that those interested in attending please RSVP by email to RSVP@kochind.com.

  • Government spending does not create prosperity

    In his op-ed Don’t buy canard about spending, Alan Cobb of Americans for Prosperity writes about the illusion that government spending creates economic growth.

    It’s an important topic, as we’ve just been through nearly a year of Obama stimulus spending, and people are wondering if the effort has paid off. Locally in Kansas, spending advocates argue that reducing Kansas state spending will cause economic growth to suffer. Even more locally in Wichita, city council members and city hall bureaucrats argue that government is responsible for managing economic development in Wichita, some going so far to proclaim that free people and free markets have failed and can’t be trusted.

    In yesterday’s Wichita Eagle, Wichita businessman Fred Berry takes issue with Cobb, and this disagreement provides a useful illustration of the difference between government and private action.

    Cobb wrote this: “If I take $20,000 from my neighbor and hire a gardener, the economy certainly hasn’t grown by $20,000. It’s simply been a shift of money.” Cobb is illustrating the effect of government spending.

    Berry wrote: “But let me use Cobb’s example in a different way. Suppose he and his neighbor decided to share a gardener, because neither needed one full time. Because Cobb’s garden was twice as large as his neighbor’s, he agreed to pay two-thirds of the cost.”

    What’s the difference between the two examples? It’s simple: Cobb is illustrating a government-coerced transaction, while Berry uses a voluntary transaction.

    There’s a world of difference between the two. Voluntary transactions are the way that wealth and prosperity are generated. These transactions happen because both parties believe they will be better off if the transaction takes place.

    This leads to what John Stossel has termed the “weird double thank you moment” when people engage in voluntary trade: One party says “thank you,” and so does the other. This happens at the grocery store and nearly everywhere people are making voluntary exchanges that benefit both parties.

    But when you pay your taxes, do you say “thank you?”

    Milton Friedman has written and lectured extensively on the topic of free markets. Here’s an example from his monumental work Capitalism and Freedom:

    Fundamentally, there are only two ways of co-ordinating the economic activities of millions. One is central direction involving the use of coercion — the technique of the army and of the modern totalitarian state. The other is voluntary co-operation of individuals — the technique of the market place.

    The possibility of co-ordination through voluntary co-operation rests on the elementary — yet frequently denied — proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.

    Exchange can therefore bring about co-ordination without coercion. A working model of a society organized through voluntary exchange is a free private enterprise exchange economy — what we have been calling competitive capitalism.

    It’s surprising to me that a businessman — here I specifically do not use the word “capitalist” — like Fred Berry would fail to recognize the distinction between free markets and government coercion. I guess I should not be surprised, as Berry made large campaign contributions to the Wichita school bond campaign in 2008, and the public schools are definitely unfriendly to capitalism. In addition, he has made contributions to enemies of capitalism like Wichita Mayor Carl Brewer and city council member Janet Miller.

    For more explanation of how free markets work from Milton Friedman, view the video below.

  • Don’t buy canard about spending

    By Alan Cobb

    “Canard” is a funny word.

    It keeps popping into my head anytime I read another self-anointed do-gooder who claims that government spending leads to economic growth.

    “Canard” means a false report — and we’ve got lots and lots of them about these claims.

    If I take $20,000 from my neighbor and hire a gardener, the economy certainly hasn’t grown by $20,000. It’s simply been a shift of money. Rearranging the furniture in your living room doesn’t increase the number of easy chairs or TVs.

    That’s what happens when your taxes pay for someone else’s salary, build a government building or pave a road.

    We value good roads and good government. But that doesn’t mean those things cause economic growth. Arguments otherwise are either deceitful or horribly misinformed.

    Many say that we don’t need to do anything but spend more government money and — voila — a land of milk and honey.

    Given the Kansas highway lobby’s assertions, Kansas should do nothing but build roads and the Sunflower State will become the promised land.

    Oh, if it were so.

    As Margaret Thatcher said, big government doesn’t work because eventually you run out of other people’s money.

    There’s also something never discussed by those wanting to line their pockets with what used to be in your pocket. The money doesn’t drop from the sky and it isn’t in your grandmother’s basement. It’s our money, and we taxpayers might do something more productive with it — though that is never measured. The citizens of Kansas might spend the billions the road lobby wants to spend on more roads (in a slow-growing state with great roads already) on something else, like starting new businesses, which would lead to growth.

    The multipliers used by those pushing the canard, cooked up in a fantasy lab, make it look even better. Multiply the $20,000 gardener salary by three — sprinkled with fairy dust — and all of the sudden the transfer of $20,000 magically becomes $60,000. So anything is justified. Want $3 million in economic growth? Just raise taxes by $1 million. You don’t need Billy Mays to sell this stuff.

    Add up all the multiplier studies and poof! Kansas’ economy is the size of Texas’.

    In a recent Wall Street Journal commentary, a Stanford University economics professor dismissed this notion and said the government-spending multipliers are actually negative. Outlays by the government crowd out private spending and require future taxes.

    Measuring the economic value of shorter commutes and fewer car repairs, accidents and fatalities is doable, but never done. Similarly measurable are the benefits of an educated populace, but the benefit is not the sum of teachers’ salaries plus the cost of the bricks in a school addition. Taking the input (tax dollars) and applying a castle-in-the-sky multiplier is not magical; it’s wrong.

    Saying the Pizza Hut that moved from downtown to the new bypass outside town is “growth” is equally wrong — and dishonest. But that’s what we hear from those pushing the canard that government spending is growth.

    There’s that word again.

  • Goal of Kansas tax reform is economic growth

    Dr. Art Hall, who is Director of the Center for Applied Economics at the University of Kansas has proposed a radical change and simplification to the Kansas tax system. Besides simplification of the way the state collects taxes, the major goal of the proposal is to encourage economic growth in Kansas.

    The goal of tax policy should be to raise the funds necessary to run government, and to do so in a way that provides the most incentive for economic growth. The accumulation of capital, which comes from savings, is the best way to promote future economic growth. Capital allows companies to expand productive capacity through making investments in machinery and technology. This leads to more jobs and higher-paying jobs. As the economist Walter E. Williams has discussed: “Ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man with the backhoe is more productive. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption) and invested in a piece of equipment that helped workers to increase their output.”

    It’s important, then, that tax policy in Kansas generates revenue for the state in a way that doesn’t harm the accumulation of capital. As Hall writes: “Taxation of the resources used for future production may well lead to less future production.”

    The solution Hall proposes is a consumption tax — a comprehensive statewide sales tax — that would replace all state-level taxes in Kansas, including the personal and corporate income tax: “Because saving and investment are key elements of the growth process, consumption taxes can better promote economic growth, all else equal.”

    He explains in more depth:

    A well-crafted retail sales tax has positive attributes from the perspective of economic growth. It represents one form of a consumption tax, a form familiar to most people. Generally, consumption taxes represent a class of taxes that do not tax money used for saving and investment, regardless of the source of that money. This feature of consumption taxation differs from traditional types of income taxation. Income taxes effectively double tax the money used for saving and investment (but tax only once the money used for consumption), thereby producing a tax bias against saving and investment, which generates a disincentive to dedicate money toward future production.

    Hall writes that “A well-crafted retail sales tax would also tax all goods and services uniformly.” His proposal even includes taxing the consumption of rented and owner-occupied housing. While true to the goal of uniformity, Hall recognizes the “novelty (and probable unpopularity) of applying the retails sales tax to rented and owner-occupied housing.”

    Hall’s paper is comprehensive and includes discussion of technical issues such as “tax cascading,” where taxes on the inputs used by businesses are taxed again as intermediate goods and services make their way through production processes. There is also discussion of what Kansas could do to make the consumption tax progressive, if that is desired. Border considerations are discussed, too.

    Currently the statewide sales tax in Kansas is 5.3%. (Counties and cities may impose additional sales tax on top of that. In Wichita the combined rate is 6.3%, for example.) Depending on the details of the consumption tax that Kansas might implement, the rate could range from 6.77% to 9.99% (those figures calibrated to produce the same revenue that the state collected in 2008).

    What would be the impact on economic growth in Kansas? Simulations conducted by Hall indicate that growth in private-sector employment could be in the neighborhood of seven to eight percent per year, depending on the type of plan and phase-in period. This is tremendous growth, especially in light of the fact that private-sector job growth in Kansas has been stagnant or declining for many years. Private-sector investment and take-home pay would rise less rapidly, but at a strong rate.

    Currently there is no bill in the Kansas Legislature that would implement a plan like this. It’s thought that an amendment to the Kansas Constitution would be necessary to soundly implement this policy. The amendment, ideally, would prohibit any income tax. Without this constitutional protection, lawmakers could reimpose either personal or corporate income taxes at any time.

    Dr. Hall’s paper may be read at A Comprehensive Retail Sales Tax as a Single Tax for the State of Kansas.