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The White House on Building a Strong Economy — Grade: D+

June 21, 2012 by Brian Wesbury

The Administration has taken up the mantle of growth. In a speech on June 14 in Cleveland, OH, the President said:

And what’s lacking is not the capacity to meet our challenges. What is lacking is our politics. And that’s something entirely within your power to solve. So this November, you can remind the world how a strong economy is built — not from the top down, but from a growing, thriving middle class.

At the 4% Growth Project we are thrilled by this. Unfortunately, differentiating between the “top” and the “middle” makes no sense. It’s a political argument for class warfare that does not need to exist. Capitalism is an organic, natural process that utilizes prices to send signals. When a capitalist system is allowed to function properly (freely), it generates cooperation, specialization, and service towards others. Every part (bottom, middle, and top) works together to lift living standards. But the key to creating wealth is the entrepreneur. Entrepreneurs tirelessly look for the best, most efficient, most profitable ways to allocate resources. Those who do this well accumulate more resources; those who fail lose resources. The very nature of this process creates people at the “top” — those who earn profits from their efforts. To demonize these people is the antithesis of capitalism. Trying to level the playing field by regulating, taxing, or otherwise thwarting their efforts harms the entire system, which in turn hurts those in the middle and at the bottom. The idea that an entrepreneur only helps herself is a false idea. Entrepreneurs profit by providing goods and services that other people value. Everyone wants a “growing, thriving middle class” in America — especially when the country is so rich that middle class here means upper class in most other parts of the world. But growth does not start with the middle class. The middle class would not exist if it were not for the efforts of the top — of the entrepreneurs. It is low cost goods and new inventions that lift the living standards of an economy and create a middle class. Henry Ford created the low-priced automobile and democratized the transportation system. Yes, those who found jobs with Ford were part of the middle class, but they did not create the system of production, Ford did. Bill Gates, and the Microsoft operating system, made computing possible for billions of people. This lifted living standards and enhanced the lifestyle of the middle class. Without access to computers today, the middle class might not exist. Steve Jobs and Apple Computer have created a whole new era of computing power and information flow. The middle class benefits again. The middle class itself did not invent these goods or services, entrepreneurs did. And these entrepreneurs became wealthy beyond most people’s dreams. The middle class in the U.S. garnered huge benefits from these inventions and became wealthy compared to most citizens of the world. Losing sight of this process — and pitting the middle class against the entrepreneur — is political. Moreover, if followed through to its conclusion, would actually harm growth and therefore the middle class itself. The President addressed some of these points, saying,

We remain the wealthiest nation on Earth. We have the best workers and entrepreneurs… I believe we need a plan for better education and training and for energy independence and for new research and innovation, for rebuilding our infrastructure, for a tax code that creates jobs in America and pays down our debt in a way that’s balanced.

But all this suggests that entrepreneurs should pay more in taxes, while the government continues to invest in education, training, and alternative energy. There are three things wrong with this argument.  First, taxing profits from the entrepreneurial process would slow growth.  When you tax something, you get less of it. Second, excluding the cost of defense and war, government spending is already at a record high, it is hard to imagine more spending at this point with debt levels already threatening to bring European-style problems to the United States. Third, funding government-favored industries with tax breaks or subsidies distorts the market signals necessary to allocate scarce resources, which would also inhibit growth. In the end, if America wants a strong middle class, it must allow the “top” to flourish. If America demonizes entrepreneurs like Ford, Gates, and Jobs, the middle class will pay for it with lower standards of living. The grade for this speech and the policies it expresses: D+. The speech gets some credit for at least addressing the issue of growth.


Author

Brian Wesbury
Brian Wesbury

2012 Economic Growth Fellow

Brian Wesbury is chief economist at First Trust Advisors L.P. in Wheaton, Illinois. He is a member of the Academic Advisory Council of the Federal Reserve Bank of Chicago. Formerly he was vice president and economist for the Chicago Corporation and senior vice president and chief economist for Griffin, Kubik, Stephens, & Thompson. From 1995-96 he served as chief economist to the Joint Economic Committee of Congress. His most recent book, “It’s Not As Bad As You Think,” was published in 2009 by John Wiley & Sons. He received an M.B.A. from Northwestern University’s Kellogg Graduate School of Management and a B.A. in Economics from the University of Montana.

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