Transcript pptwv - The Citadel

Unleashing Capitalism
Russell S. Sobel, Ph.D.
•Over 5,000 copies sold
•Over 200 public presentations
•Presentations to 2 Governors
•Won Sir Antony Fisher Award
What Explains Prosperity?
Adam Smith’s Question:
Why Are Some Countries Rich and Others Poor?
An Inquiry into the Nature and
Causes of the Wealth of
Nations (1776)

Policies and the system of economic organization
(e.g., capitalism) matter more than things such
as resources, geography, education, etc.
Rankings of Reliance on Capitalism
Economic Growth is a Function
of Both “Inputs” and “Institutions”
Economic Inputs and
Resources
Rules of
the Game
(Govt.
Policy)
Economic Outcomes
Source: Hall and Sobel (2006).
Examples:
Skilled Labor Force
Technology & Infrastructure
Resource Availability
Financing for New Businesses
Examples:
Tax System Structure
Business Regulations
Legal/Judicial System
Private Property Right Security
Examples:
Wage and Income Growth
New Business Formation
Jobs Created
Patents Issued
Goods and Services
Route 50
Wise use of Tax Money?
North Korea vs. South Korea
Per Capita
Income
= $1,800
Per Capita
Income
= $24,200
States also Differ in Reliance on Capitalism
West Virginia Ranks
50th in Capitalism
We are less “free market”
than Estonia and Latvia
WV’s PCPI: Rank 48th – 75% of U.S. Average
We Are Falling Behind Other States
Per Capita Personal Income Rank
West Virginia's Rank Among States
25
30
1934
35
40
45
50
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Figure 1.3: State Growth Comparisons
$35,000
Per Capita Income
$30,000
$25,000
$20,000
$15,000
$13,361
$13,900
$13,194
$10,000
$5,000
$0
West Virginia
Georgia
1965
North Carolina
2005
1965 PCPI Ranks: WV=42, GA=41, NC=45
Figure 1.3: State Growth Comparisons
$35,000
$31,191
$31,029
$30,000
Per Capita Income
$26,029
$25,000
$20,000
$15,000
$13,361
$13,900
$13,194
$10,000
$5,000
$0
West Virginia
Georgia
1965
North Carolina
2005
1965 PCPI Ranks: WV=42, GA=41, NC=45
2005 PCPI Ranks: WV=48, GA=33, NC=35
Growth Rates: WV=1.4%, GA=2.0%, NC=2.2%
What Faster Growth Means for Future Prosperity
Figure 1.2: Which Future for West Virginia?
$90,000
Per Capita Income
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
Historical
1.4% Growth
1.9% Growth
2055
2045
2035
2025
2015
2005
1995
1985
1975
1965
1955
1945
1935
1925
$0
2.4% Growth
Average income in West Virginia will reach $50,000 an entire generation
earlier if we can increase long-run growth by just one percentage point
How Can Policy be
Reformed to Better
Embrace Capitalism and
Promote Long-Run
Growth?
Today I’ll give a “menu” of reforms in 5 major areas
1. Lower Taxes & Regulations on
Productive Activities
Examples:
Capital Investment


Business franchise tax
Personal property tax on
inventory, machinery
and equipment
Labor Force
- Welfare Reform
Earned Income
Spendable Income
$0
$6,000
$12,000
$11,026
$11,014
$15,286
2. Discourage “Unproductive” Uses
of Resources
(e.g., excessive lobbying or lawsuit abuse)
Examples:
Legal Reform



Our new book: “The Rule of Law”
End Partisan Election of Judges
Venue Requirements
Avoid targeted taxes, credits, &
subsidies - they encourage lobbying
3. Rely on Entrepreneurial Discovery, Not
“Central Planning,” to Guide the State Economy
An economy undergoes continuous change
– some industries fail, others are born
Capitalism critically relies on entrepreneurship and
the profit and loss system to direct this process
This process cannot be centrally planned or directed
effectively - it must be discovered within the
marketplace
The Reason …Because Nobody Knows
Ken Olson, chairman/founder of Digital Equipment Corp., 1977.
"There is no reason anyone would want a computer in their home."
Fred Smith’s (FedEx) Yale University Senior Project Grade Remark:
"The concept is interesting and well-formed, but in order to earn
better than a 'C,' the idea must be feasible."
Would You Have Invested?
Microsoft Corporation, 1978
To Promote & Unleash Entrepreneurship:

Avoid interfering with the profit/loss mechanism

Avoid regulating prices or wages

Privatize or induce choice whenever possible

Don’t impose barriers to entering occupations &
industries
Barriers to Entrepreneurship
4. Reduce Government Size,
Growth, and Centralization


Goal should be to increase the share of our
state economy controlled through the private
sector
An important first step is to constrain future
state spending growth
Growth of WV State Govt.
West Virginia Real Per Capita State Spending
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
1860
1880
1900
1920
1940
1960
1980
1921 B&O Tax Adopted – Converted to Bus Franchise Tax 1987
1933 Consumer Sales Tax Adopted
2000
4. Reduce Government Size,
Growth, and Centralization



Goal should be to increase the share of our
state economy controlled through the private
sector
An important first step is to constrain future
state spending growth
Overall spending can also be reduced and
made more effective by decentralizing
spending to local governments (WV is 2nd
most centralized state)
5. Increase the Security of Property
Rights & Impose Checks on the
Regulatory Environment

Restrict the use of eminent domain for
private redevelopment (post-Kelo)
(H.B. 4048 was passed in 2006 but it didn’t go far enough)

Regulations should be subject to costbenefit analysis (and include sunset
provisions based on proof of effectiveness)
- Ex. Mine Safety, ATV
Thank You / Q&A
The Rule of Law: Reform Summary
Replace partisan elections of judges with nonpartisan elections
Restrict the power of local governments to use Eminent Domain
(prohibit private transfers & redefine “public use and blight”)
Eliminate joint and several liability in all civil tort claims
End venue shopping by imposing meaningful venue requirements
Impose statutory limits on punitive damage awards, or increase
the standard for determining when to award punitive damages
Create intermediate appeals court system and an appeal of right
Revise the standard for “deliberate intent” in workers
compensation cases