Monday, September 5, 2011

Cameron Smith: Economic Freedom: Building up, not trickling down

  The ability of Americans to conduct commerce and participate in the economy is an essential component of individual liberty. Free markets provide the most efficient mechanism to allocate the goods, services, and resources in the economy.

  So what?

  Many Americans are more concerned about how economic policies impact them and their neighbors than they are with "efficient mechanisms" or "rational service allocation." As a result, the free market is in increasing danger in the United States because its proponents have spent far more time advocating efficiency, reliability, and the right of wage earners to keep their money than they have appealing to the sensibilities of the common man.

  Some political minds view inequality in the world as clear and convincing evidence of wrongdoing. To right these wrongs, they believe governments should tax those who have more in order to provide for those who have less. Accordingly, they submit that governments should also regulate and control the marketplace to achieve "good" results as a means to bring about certain ends such as social justice and egalitarian economic outcomes.
  These advocates for heavy government intervention suggest that their ideas should be preferred over the free market because they appeal to Americans' sense of "fairness." Free market supporters routinely respond by stating that tax breaks for corporations and high income earners create economic growth which then trickles down to lower level workers. While there is definitely some logic to the trickle-down theory, it dodges the challenge of "fairness."

  The philosophy of government control and intervention may be based on noble intentions, but is deeply flawed by blind arrogance, paternalism, and an abject failure to obtain the "fairness" it holds as its highest objective.

  The initial differences between the two major American political parties seem relatively straightforward. Republicans support scaling back government programs, increasing tax cuts, and minimizing the role of government. Democrats tend to support tax increases on businesses and the wealthy as well as "strategic" government intervention in the American economy and society as a whole.

  These fundamentally different political perspectives both have the potential to harm the free marketplace. Governments do play an important role in the marketplace and America's Founding Fathers recognized the importance of some regulation of commerce in Article 1 of the Constitution with the balance of that power held by the states. Governments can improve the marketplace by ensuring consumers have the ability to make informed decisions and companies do not have unjust competitive advantages.

  Unfortunately, government responsibility has become a liability. When politicians attempt to control the marketplace through regulation, subsidization, or taxation, they effectively impose their concept of "fairness" on the rest of the population. In other words, their ideas of the "right" food, energy, healthcare, banking, and other goods and services are forced on the American people.

  Examples are plentiful where regulations, subsidies, tax preferences, and even a national appetite for debt have undermined fundamental free market principles in the United States:

  The Small Business Administration Office of Advocacy reports that the "annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008." Many of these costs are passed through the cost of goods and services sold to consumers, impacting their purchasing decisions.

  Direct price subsidies such as the Milk Income Loss Contract (MILC) Program use millions of taxpayer dollars to effectively set price floors for certain products. The MILC program alone cost taxpayers $330 million in fiscal year 2008. Are these programs expensive, but they also increase costs for consumers by artificially creating economic demand with taxpayer dollars.

  Although tax preferences do not directly redistribute resources in the marketplace, they do provide competitive advantages to specific industries. Biofuel tax credits are a great example. Reduced federal taxes for biofuels essentially provided a $6 billion dollar subsidy in fiscal year 2009.

  And even the government's approach to debt accumulation could impact the free market. Swedish economists Andreas Bergh and Magnus Henrekson have posited that increasing government size by ten percent may result in as much as a one percent decrease in annual growth rate of the economy.

  The real cost is more than just a dollar figure. With the erosion of the free market, Americans lose opportunities to determine their personal economic future. Take a small state regulation as an example. A licensed manicurist in Alabama needs as many as 1200 hundred hours of training. In Massachusetts, the same profession requires only 100 hours. For a single mother with limited resources, the cost and time of the extra 1100 hours of training may be the difference between starting a small business to improve her family's economic prospects and never trying at all.

  The free market should be defended because it provides true fairness by allowing every American an opportunity to build a better tomorrow rather than simply hoping that the wealthy or the government will drop a few crumbs their way. In America, an African-American woman from Kosciusko, Mississippi can become a billionaire, the son of a postal worker from Brooklyn's projects can run Goldman Sachs, and American children can dream ... BIG.

  While the economic policy justifications for a free marketplace are both necessary and useful, the real counter to the "fairness" of governmental control need be nothing more than the story of opportunity for people from all walks of life in America. Ronald Reagan said it best, "growth, prosperity and ultimately human fulfillment, are created from the bottom up, not the government down."

  About the author: Cameron Smith is General Counsel for the Alabama Policy Institute, a non-partisan, non-profit research and education organization dedicated to the preservation of free markets, limited government and strong families, which are indispensable to a prosperous society.

  This article was published by the Alabama Policy Institute.

1 comment:

  1. One portion of Counselor Smith's piece that made some sense to me follows: "Governments can improve the marketplace by ensuring consumers have the ability to make informed decisions and companies do not have unjust competitive advantages."

    I'd also add that better regulation could have potentially avoided, or at least lessened, the global financial meltdown we're currently suffering through. Those who've experienced housing values and retirement funds hemorrhaging hopefully see an additional value in regulation and enforcement.

    Smith also mischaracterizes the reasoning different facets of what passes for the left hold for regulation. He also advances the Horatio Alger myth. Class mobility in the US continues to shrink and income inequality is at an all time high. This is largely due to policy decisions in vogue since at least the Reagan administration. Add in "New Democrat" ideas from Clinton with NAFTA and other neo-liberal nightmares and here we are.

    I appreciate that Counselor Smith's Alabama Policy Institute exists to advance such ideas. They are part of the well-funded effort to have state think tanks pushing out such as this.

    Lastly, as to the SBA study referenced, and shed light on the work done by Professors Crain.