"The Master value is trust. There are no relationships that can survive for very long without it."

- Jim Amos

Setting the Stage for a Rebirth of American Capitalism

November 20th, 2013

It’s up to business leaders to educate the public about what free trade really means.

Capitalism is in pretty rough shape in America. The Great Recession was horrible enough — forcing business owners to scramble and work even harder to keep their businesses open — but the aftermath of the recession has been appalling. The current administration responded to populist anger at the state of the economy by demonizing businesses and implementing a raft of regulations that have made it harder to start and grow a business in America, contributing to a painfully slow economic recovery.

It should be clear by now that the administration has been writing the wrong prescription for the still-weak economy. You cannot regulate your way to growth. You cannot harness the dynamism of entrepreneurs by putting them in a steel trap.

Jim Amos was recently a guest on Ron Siegel Home & Finance Radio. His segment begins at the 14-minute mark:

http://www.ronsiegelradio.com/ron-siegel-home-finance-radio-oct-22-2013/

This may seem obvious by now, but to many Americans, it is not. That’s why business leaders need to speak out and make the case for free trade and far less regulation. We need to provide the American people with a more accurate narrative to explain what we have been through and how we got there, and to explain the source of America’s economic strength and why it has been diminished.

How we got here

Those who believe in more regulation focus their attention on the rampant ethical lapses in the banking and mortgage industries that helped create the recession. What they often ignore is the fact that government policies helped warp the real estate market in the first place.

During the 1990s, in an effort to encourage more lending in low-income neighborhoods, new banking regulations required banks to use “innovative or flexible” lending practices to meet the credit needs of low-income borrowers. The sub-prime loan was born. Risky loans were then embraced by government-backed Fannie Mae and Freddie Mac, which dove into the market in an apparent effort to quell criticism following an accounting scandal in 2004. With lawmakers questioning whether Fannie Mae actually helped American home buyers, the company responded by acquiring a raft of sub-prime loans in order to encourage low-income home ownership. The Joint Center for Housing Studies at Harvard University reports that the percentage of all mortgages that were conventional 30-year fixed rate fell from 57% in 2001 to 33% in 2006, while risky loans (those to borrowers with poor credit or borrowers who provided little documentation — so called “liar loans”) rose from less than 10% to nearly 33% of the market. When the housing market collapsed, and took the economy with it, a political rush to find people to blame ensued at lightning speed.

Regulations are not the answer

The current administration made business into a bogeyman, painting business owners not as job creators and hard-working stalwarts of their communities, but as small-minded tycoons whose avarice must be constrained by reams of regulation.

Whenever a problem occurs in the economy, lawmakers race to create new laws — and bureaucrats rush to create new rules — in an attempt to drive risk out of the economy.

It’s a fool’s game. Risk — whether in the form of risky business partners or risky business practices — will always be part of the economy. The good news is, left to its own devices, the marketplace punishes poor business practices much more severely than the government could hope to do. Businesses thrive based upon their reputation, and those who prove to be poor partners quickly lose the opportunity to do business. Likewise, businesses that harm consumers can face ruinous lawsuits.

The truth is that regulations have expanded at a pace that makes them as harmful as the practices they seek to curb. According to the Competitive Enterprise Institute, U.S. regulations cost the economy $1.8 trillion in 2012 — which equates to $14,678 per family. Can you imagine what those numbers will look like once Obamacare is fully implemented?

Even now, before Obamacare is in full force, regulations account for 12% of GDP. But if you cut those costs in half, you would instantly quadruple the growth rate of the economy!

The overwhelming majority of businesses in the United States are small businesses, and small business growth is responsible for almost all the net job creation over the past 30 years. Excessive regulation is disproportionately harmful to small businesses, which cannot afford an army of accountants, lawyers and lobbyists in order to navigate and/or manipulate regulatory mazes.

By choking small businesses, government is eating the seed corn of the economy.

Higher taxes aren’t the answer

At best, taxes promote common needs that serve the interests of all citizens — but taxes don’t build wealth. Too often, taxes are used to redistribute wealth in the hopes that by doling out money, government can eliminate or at least reduce poverty. That has been the operating theory for Democrats since at least the 1960s, when FDR’s New Deal was expanded into the “Great Society” plan of Lyndon Johnson, and it’s not a coincidence that American wages and standards of living have been slipping ever since.

People get wealthy for a reason: They participate in an exchange of goods and services that deliver value to their customers and business partners. They build wealth for their whole community in several ways. To use a very simple example: If a factory can produce and profitably sell a chair for $40 instead of $100, the efficiency means the community can afford more goods (chairs) and services ($60 extra in the budget for other items). If that same factory owner employs a dozen people, then wages flow into the community. And typically, as a factory owner accumulates wealth, he or she will reinvest it in order to gain even more efficiency or engage in new forms of trade.

When wealth is siphoned away from entrepreneurs, less innovation happens in the marketplace, and that causes the economy to stagnate. At the same time, high taxes disincentivize hard work, which also hurts the economy. High tax policies thus undermine both capital and labor investment.

It’s time to re-awaken the American promise

For most of the last six years, business leaders have been so busy bailing water and trying to keep their ventures afloat that they have been largely absent from the fight over the direction of the government. There was a battle over Obamacare, which the business community lost, and a battle over regulations, which the business community is losing.

The only way to change this tide is to educate the American people about the size and scope of the regulatory state, as well as the dynamics that drive economic growth. To my peers, none of what I’ve written will be a surprise — but we need to do more than speak about these things with one another. We need to take our case to the American people by reminding them of our heritage and re-awakening the moral and ethical case for free markets and free people and free enterprise. I hope you’ll help me do it.

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