When it comes to economics, real capitalism must prevail over socialism and state capitalism/corporate welfare or we‟re all in trouble.
The principled conservative has an economic prophet and we might as well shout his name from the mountaintops: Milton Friedman. Who would think that in the early 21st century all those boring economics classes many took in college would be startlingly relevant? But we currently find ourselves in a heavyweight bout between John Maynard Keynes‟ vision of democratic socialism (or state-controlled capitalism as it is often sold) versus Milton Friedman‟s vision of capitalism and freedom. Let the principled conservative be clear on this point—Keynes was wrong, Friedman was right. Friedman was also right about the proper role of government and society which makes capitalism and freedom so interlinked. He observed that:
“The great advances in civilization, whether in architecture or painting, in science and literature, in industry or agriculture, have never come from centralized government.”21
While it is not necessarily to cite every utterance of Ronald Reagan to guide a 21st century principled conservative vision, the following Reagan quote concisely summarizes the basic Friedman economic principle:
“you cannot tax and spend your way to prosperity.” To amplify further, it is not possible to fine-tune the economy through a yo-yo of spending and tax increases and cuts as Keynes recommended. The Keynesian says we should cut taxes and increase government spending in an economic downturn to stimulate the economy (through deficit spending of course) and raise taxes and cut government spending in an economic boom to reduce inflation. It sounds great in theory, but just never works in practice.22 The principled conservative believes the best path for sustained economic prosperity is that taxes should always be low and government spending should always be constrained.
To be true to the principles of our favorite economist means the principled conservative must prevail against those opponents with a socialist vision they relentlessly pursue despite all evidence that it leads to disaster. We must repeat it again and again: capitalism leads to prosperity for all people while socialism never works and leads to misery. Capitalism recognizes human nature and that individuals work hardest for their families and their own business, and this creates riches for all. Socialism denies essential human nature and expects a utopia where we are all secure in the government running most aspects of our lives. True capitalism also promotes individual freedom, where the government‟s role is properly understood as protecting individual property rights, rights to associate, and fair competition (not picking winners and losers).
It is a gross distortion to suggest this advocates a return to “laissez faire” and no role for government regulation.
Since capitalism means competition, as Milton Friedman said, a competition must have a fair referee. Whether or not the Securities and Exchange Commission has always effectively exercised this role in regulating publicly traded companies on the stock market is beyond the scope of this book. The principled conservative, however, is rightly skeptical of regulatory schemes that might cause greater harm than the problem they are attempting to address. For example, it is debatable whether the Sarbanes-Oxley regulatory scheme, approved by Congress in reaction to corporate financial scandals of the early 2000s, will accomplish its purported goals or merely add more administrative cost to public corporations and thereby discourage their creation in the first place.
An even more recent example is the financial reform law that President Obama and the Democratic Congress rammed through in 2010. Naturally, the liberal approach adds more government bureaucracy to regulate the markets, without really understanding exactly how or why existing regulatory bodies like the Securities and Exchange Commission failed to do their job in the first place. Or, for that matter, truly understanding the root causes of the economic problem. Further, we must also draw a clear distinction between the intentional criminal acts of some individuals (Bernie Madoff or Enron executives come to mind) —which certainly can and should be prosecuted under existing laws but are difficult to detect in advance even by competent government regulators (which may in itself be an oxymoron)—versus the task of developing reasonable regulations/playing rules for law-abiding individuals and corporations. Unfortunately, the policy bias seems to be towards the larger corporation versus the smaller business, as ultimately it is not the large multi-national corporation that will have trouble complying with the new regulations or gaining access to credit. It will be the small business considering going public, or trying to access credit to get started in the first place. But this should not be surprising. The Keynesian economic engineer generally favors large corporations because they can be co-opted by the government, acceding to excessive regulatory demands in exchange for the benefit of having the government help them to keep competitors out of the market. So, in a sense, they become a quasi-state supported enterprise.
But let us step back a minute and examine why there was a market in the first place for risky subprime mortgage-backed securities that led to the financial crisis. It was due to misguided government intrusion. The principled conservative understands that the housing collapse was a failure of liberal social engineering, rather than capitalism. As noted in Chapter 2, government policies decreed that home ownership was so important that the old-fashioned method of saving up enough to make a decent down-payment, or having a decent credit rating, must be tossed out the window. In sum, the government has spent years forcing banks to make bad loans to people with poor credit. Couple this with the Federal Reserve keeping interest rates artificially low to encourage excessive borrowing. What could possibly go wrong with that scheme?
This explanation does not excuse or deny that many banks and other financial institutions made poor investment decisions and/or packaged extremely complicated and risky financial instruments. The principled conservative simply says the best explanation is that we had the worst of big government in bed with large financial institutions to create a perfect storm. Our policy response should not be to reward either big government or large financial institutions for getting us in this whole mess in the first place. But rather than enacting reasonable and less intrusive reforms such as increasing reserve requirements for banks, liberals viewed the situation as a great opportunity for the government to assert greater control of the economy. In contrast, the principled conservative has one overriding consideration—making sure the referee is fair and reasonable.
But while we have attempted to stomp on socialism in this chapter, the clever Keynesian will argue that they are not socialists at all. That really depends on how socialism is defined. Perhaps state capitalism is a better term.
True, the current Keynesian-Obamanite does not necessarily want the government to own and operate most corporations (the auto industry bail-out to the contrary). In practice, they pretty much look like traditional tax and spend liberals, with the caveat that politicians of this mindset like the taxing and spending part much better than the Keynesian-recommended tax cuts in bad times and government spending cuts in good times. This crowd will argue they are simply making capitalism work better and with less disruption for the average working person. It is a seductive argument, and all the more reason why the Milton Friedman-loving principled conservative must utterly reject the Keynesian notion that government spending can pump up consumer demand. Governments should spend on projects and programs that are meritorious and would not exist but for government. Government spending, however, can never spur the creation of private employment expansion on any discernable level.23 Remember, government pays a defense contractor for a jet fighter because that is necessary for the national defense, not because the government wants the contractor to create jobs. That may be a side effect, but the government does not have enough taxpayer money to contract with every business that creates a valuable product or service. This is done by consumers, and they do this best by not having large chunks of their income taxed away. Further, if given a choice most workers would prefer a good-paying job based on secure private economic growth rather than the vagaries of government contracts and funding.
Hence, we must reject economic stimulus spending proposals in principle, although some aspects of stimulus proposals might have merit based on the underlying projects. For example, an interstate highway system resurfacing project may be worthy of government funding whether or not the country is experiencing a recession or boom and regardless of the employment impact. Conversely, giving tax breaks, credits, or outright cash from the government for people to buy individuals products is the worse form of Keynesian economics. It is not only useless but ridiculous. If we really embraced Keynesian economics to the max, where do we draw the line and stop the stimuli spigot? Sure, who wouldn‟t mind receiving some government cash to purchase a large flat screen TV, a new Wii game, a new car, or a vacation house? But it would be terrible public policy and a waste of taxpayers‟ money to provide such a buying stimulus. The lesson the individual should hear from their representative government is that it creates the conditions for all these products, services, properties, etc. to be available. If you want them, then get the education you need and work hard to earn the money you need to buy them.
Exposing this fallacy of government stimulus spending is not a new revelation. Economists pointed out very early in the last century that while in theory the government could stimulate work by hiring one set of individuals to break windows and another set to repair them, in practice this would result in a wasteful diversion of resources and no new economic growth.
At the risk of being called heartless for our unwillingness to throw out (or up) government money at the first sign of an economic downturn, the principled conservative should be clear that there will always be economic ups and downs in a capitalist system. But there has been and there will always be recovery unless the government acts so stupidly as to prolong the economic downturn. And here we must go all the way back to the Great Depression to examine why so many have gotten it wrong since then. Some may remember their initial shock when their college economics professor pointed out that all of the New Deal‟s spending and regulatory schemes did not rescue capitalism or bring America out of the Great Depression. As pointed out in a more recent analysis,24 unemployment in January 1938 was 17.4 percent and the Dow Jones Industrial Average at 121, almost exactly the levels under the disparaged Hoover Administration (17.4 percent unemployment and a 140 Dow Jones in September 1931) and only slightly ahead of the imagined depths of the depression in October 1933 (22.9 percent unemployment and a 93 Dow Jones). Yet whenever America has an economic downturn, there is always some damn fool (or presidential candidate) suggesting a massive federal government spending spree to rescue the economy. The principled conservative must always say it didn‟t work then and it won‟t work in the 21st century. It will, however, crowd out private investment, increases taxes, and increase the deficit—all of which will significantly hinder economic recovery. As this book is being written, the puzzled faces of Obama administration officials wondering why their economic stimulus has not stimulated would be funny if it were not so serious in terms of dramatically expanding the federal deficit without helping the very working people they are claiming to help.
Because of their failure to understand economics, the liberal/progressive crowd seemingly believes that if they hector businesses and stomp their feet and scream loud enough, jobs will be created and unemployment will go down. Yet, when enacting a regime of high taxes, burdensome regulations, and high government debt—which we‟ll conveniently call Obamanomics—that is very unlikely to happen. Or, put another way, you can‟t hate markets and treat them like dirt, and then expect them to perform to the max.
Is there really “pure capitalism” practiced anywhere?
The reason this question must be posed is that we already know the results of pure unadulterated socialism via the disastrous Soviet and Chinese Communist experiences of the 20th century. Other countries tried it too, but none had quite as much “success” as the Soviet Union and Red China in killing economic opportunity along with tens of millions of their own citizens. The Nazis were of course socialists as well. But it is often asserted that democratic socialism is possible and that the dividing line between capitalistic or socialistic countries is a grey one. However, refer back to the contemplated membership criteria for the association of western democracies discussed in Chapter 1. If a country hits the mark on these criteria, it would be a far stretch to refer to it as a socialistic country. We are focusing on the economics of the marketplace, not whether safety net or social welfare programs exist. Where free trade is supported and where private ownership of business is protected, that is essentially a capitalistic country. Ah, but what about countries where the government is a major investor in or owner of an enterprise, like France with Airbus or the U.S. with General Motors? We would simply refer to these as examples of where capitalist countries have fallen off the wagon in a few circumstances, much like a drunk or drug addict. But these things stand out because they are the exception, not the rule. The principled conservative does acknowledge there are various degrees of capitalism practiced among capitalist countries. And that many such countries would be better off staying on the wagon and eliminating practices that distort the marketplace, as discussed in the next section.
The principled conservative is not in bed with big business. In fact, we oppose corporate welfare.
One of the greatest misconceptions constantly promoted by the mainstream media and assorted leftists is that conservatives are just advocates and apologists for big business. However, the compelling principled conservative vision is one of business competition rather than government protection or subsidy (via special tax treatment, direct dollars, or regulatory protection) for the largest corporations. It is also interesting that despite the stereotype of big business and Wall Street being enamored of Republicans, in fact far greater recent political giving from these sources has been to Democrats. But this is not surprising because larger corporations believe they can influence federal policy and receive favorable regulatory and tax treatment to their advantage (and to the disadvantage of their competitors). The principled conservative should not be shy about stating that this is just plain wrong because it‟s one of the worst market distortions. It has been called various names over the years: corporate welfare, state capitalism, crony capitalism, or way back to Adam Smith who called it mercantilism. But it is acknowledged that conservatives might get more credit for this position if they stuck with this principle and stated plainly that such arrangements should be opposed.
This position is not to be confused with nor is it contrary to the principled conservative position that any business, large or small, should not be subject to undue or excessive regulatory burdens. That is an altogether different matter than having unfair competitive advantages bestowed upon a business by the government.
Further, while there are certainly efficiencies or economies of scale for large multi- or trans-national corporations, conservatives should on principle never forget to advocate for fair competition for small business.
All large businesses once started out as small businesses, which is possible if governmental policy allows them to flourish without undue hindrance. However, we must accept the reality that when corporations become large they naturally desire to prevent smaller businesses from gaining market share at the larger company‟s expense.
That is certainly a fair goal for the large corporation, but the government should have no stake in the final outcome or favor the existing large corporation over the up-and-coming small business. Or vice versa.
But the problem with many federal business regulations is that they are premised on large companies having thousands of employees. These large organizations are better prepared to deal with the burden of paperwork that is required for compliance. While such laws and regulations often exempt small employers, this is still rather arbitrary. Sure, the employer with perhaps 100, 50, or 25 employees is off the hook, but what about the employer who is just slightly larger? They are getting the shaft. The principled conservative should speak up against these inequities. And we should not hesitate to point out the many circumstances where the media gushes over a large corporation getting on board with a federal legislative or regulatory proposal, when upon closer examination it turns out that the large corporation merely wants to have regulatory costs imposed on a smaller competitor that it will be easier to defeat in the marketplace with a rigged game. So, for example, when a large corporation‟s CEO argues for retention of the estate tax, it should not surprise us that this policy allows his company to buy up small family-owned businesses who must sell in order to pay the estate tax. Or when a large corporation agrees to a federal regulation that could bankrupt many small businesses in the same field. No matter the purported rationale for subsidies, the principled conservative must be opposed to government policies that tilt the playing field to one business or type of business over another, or to prevent market entry of
competing businesses. The principled conservative must also oppose uses and interpretation of antitrust law in a manner to let a market loser attack their competitors.25
While wishing to create individual wealth and praising those who are financially successful, the principled conservative recognizes that many of the wealthiest members of society can often be found promoting policies that would prevent others from obtaining the same level of wealth. Whether this is out of a sense of guilt over their own well-deserved or ill-gotten wealth, the principled conservative does not advocate public policy to assuage others‟ guilt, phobias, childhood anxieties, or whatever else would drive them to attack the very system and policies that helped them and their families become rich and sometimes famous. Who knows why the Kennedy family in two generations swung from rampant capitalists to quasi-socialists. History is replete with children of the rich either leading aimless lives, or throwing their family wealth towards creating foundations seemingly dedicated to promoting socialism. It should come as no surprise that Warren Buffett and Bill Gates want billionaires to give half of their money away. Presumably, to support left-wing charities that can attack capitalism. How silly. Here is simple guidance: in crafting public policy to promote wealth creation, it is often best to ignore the policy advice of the very wealthiest in society.
The principled conservative should speak out boldly against all sorts of corporate welfare so it will be crystal-clear that we are not the cheerleading section for big business. Unfortunately, there are many corporate welfare programs currently operating in 21st century America:
ss to poorer communities, but which often
wind up in the hands of corporations in America‟s wealthiest communities;
-Marts, that of course are not provided to smaller
businesses;
Overseas Private Investment Corporation;
intended as bashing Major League Baseball. But they should play by the same rules as everyone else. 26
And it‟s hard to know where to start with the ludicrous billions in federal farm subsidies, which often benefit huge farming conglomerates like Archer Daniels Midland rather than the family farmer.
In this discussion of corporate welfare, the astute observer of history would note that a traditional 20th century liberal would identify with the disdain for such practices versus what the 21st century liberal/progressive often accepts as gospel. One should always be cautious about huge initiatives that require a public-private investment, because these often mean the enrichment of one company at the expense of others and to the detriment of consumers. The principled conservative believes that the rise or fall of private enterprise should not be dependent on massive government subsidies or favorable (or negative) regulatory treatment.
We don‟t have a problem with lobbying and political contributions; but Congressional earmarks are just bad on principle.
“Special interests” is a pejorative term that should not be so. Actually, everything that matters is a special interest, whether those lobbying for a specific business, an entire industry, a non-profit association, or a “public interest” organization. They all represent real people and real interests. And they all have the freedom to associate and petition the government under the Constitution. There should be little cause for concern on this matter. The principled conservative leans towards a system of full disclosure and publicity of political contributions, as compared to the restrictions and convoluted rules that largely describe our current system. The same goes for individual political giving. Why should we care if a billionaire underwrites a candidate, so long as that information is quickly and publicly available? After all, the recipient of such funds will certainly be expected to defend herself in the court of public opinion as to whether the billionaire is simply pulling the strings and calling the shots. Let‟s look at it another way: if a candidate is persuasive enough to convince a billionaire to support her campaign with a large donation, maybe this is a demonstration of her exceptional leadership qualities and powers of persuasion. Not bad characteristics for a political leader!
Yet, there is one aspect of lobbying for public policy initiatives which raises the ugly specter of influence peddling, from steering government contracts to a particular company or providing corporate welfare as discussed above. When we say that sometimes government regulation is needed and it must be very efficient, this is an area where there should be a wall of separation between the politics of fund raising and the government‟s management of grants and contracts. Pay-to-play is too often the norm (see Chicago and Illinois politics), but this is contrary to the principled conservative‟s notion of a fair society, especially fairness to taxpayers. To help facilitate this, we‟ll take the cue from John McCain but go even further. Let‟s consider a constitutional amendment to eliminate earmarks from the federal budget. Namely, Congress should only appropriate funds for agencies and their related programs that offer competitive grants and contracts. This further demonstrates that the principled conservative does not seek to conserve that which is bad, ill-functioning, or corrosive. This would certainly require a major change in the current system, particularly the way Congress works through legislative “log-rolling” (i.e. you support my piece of legislation and earmark if I support your legislation and earmark). We may even be accused of being naive. But, we cannot speak about a fair society while condoning corruption and the revolving door of influence peddling, whether for defense contractors or community activist groups. Earmark elimination won‟t solve all the problems, but it would solve a lot of them. Sure, agencies will still make contracts and grants to individual firms, but they will do so at their own discretion absent Congressional directive on the recipient and separate from any consideration of who gave what to political campaigns.
Corporate executive compensation
While the principled conservative opposes corporate welfare and a tilted playing field, we also defend the right of private enterprise to decide how much they wish to pay their employees, from CEO on down. What business is it of the government? The key is to have the board of directors do their jobs, not having government attempt to determine what is appropriate employee compensation. Admittedly this has become more complicated with recent government investment in, loans to, or outright ownership of certain corporations. And let‟s face it, the disputes are always over perceived excessive chief executive compensation, not how much the assistant accounting manager is making. But even in these circumstances, there is a risk that by adopting restrictive schemes and/or not paying for talent, other firms without the government help will recruit away the best talent and then out-compete the government-assisted firms. The best approach is still to hold the corporation‟s board of directors accountable, and make the market forces keep pay in line. Yet, the recent financial regulation law puts the government in the middle of determining when there is too great of a disparity between CEO pay and the “average” worker. God forbid we acknowledge that the CEO, and other senior managers, are actually far more valuable to a business enterprise that many of its workers. Word processing file clerks are a dime a dozen.
Visionary brilliant CEOs are not.
Unions in America are increasingly incompatible with excellence, organizational unity, innovation and even prosperity, especially public sector unions.
Admittedly this heading sounds anti-union. It is. Few would deny the many improvements in working conditions as a result of union activities. But their history is not pristine, with past corruption and influence by both organized crime and Communists in many industrial unions. Today, even many historical fans of unions (including the author whose father was a lifetime union member) bemoan that unions seem to have lost focus and are more concerned with their own union bureaucracy and bashing businesses. Indeed, most unions have become merely a political arm of the Democratic Party. But unionized workforces today do not seem to be especially compatible with individual advancement, organizational excellence, or profits. Does anyone other than the diehard believer really think America would be better off if more of the workforce were unionized?
Worse, many unions are seemingly oblivious to competitive forces, preferring that companies price themselves out of the market. General Motors would be out of business but for a massive government bailout. Besides dragging many private sector companies down, the public welfare, good government, and the interests of the taxpayer are especially ill-served by public sector unions. As of this writing they have succeeded in bankrupting the state of California, operating as ongoing conspiracy against the public interest and the taxpayer.
Just as companies must innovate to survive, unions should not be oblivious to competitive forces. The principled conservative openly acknowledges that we want to tip the legal balance back towards the employer rather than the union. However, we have a political deal to offer. Let‟s end corporate welfare and re-balance the labor laws impacting unions in the same legislative package. For example, the determination of overtime pay at present is based on laws from the 1930s, which are premised on the assumption that most workers are in a punch-the-clock type of rote processing job on a factory assembly line. Does that really describe the current high-tech, multi-tasking workforce? A one-two punch of legislation to simultaneously end corporate welfare and reform our labor laws to put unions back on the right track would make American society much better off, as the expected economic growth would be staggering. Ironically, there is a great need for union organizers in China and India. We wish them the best in such endeavors!
The principled conservative believes a capitalist system best helps those around the world who are poor.
This statement is completely consistent with appropriate U.S. foreign policy goals discussed in Chapter 1.
Promotion of free societies with a rule of law, individual rights, property rights, and free trade and democratic elections are what should be promoted and is in the best interest of America and freedom everywhere. And remember that under the “no respect to tyrants” doctrine, to the socialist or anti-capitalist dictators of the world the principled conservative says you‟re completely wrong and who elected you leader of your country anyway?
And to those who still think democratic socialism works, we note that the so-called socialist democracies of Western Europe have all in the past 30 years turned to more private enterprise and free market solutions with lower corporate taxes. Take a look around the world today at which types of societies hold people back and keep them mired in poverty. Then once more review the membership criteria for the association of western democracies discussed earlier. In theory and in practice, it is nearly impossible to think of a current country meeting such criteria for western democracies without giving individuals in their societies an excellent opportunity to succeed. It is also important to remember that in western democracies even the very poorest in society have living standards far above all but the most privileged elite in a totalitarian socialist regime.