Book Review of The Road to Freedom: How to Win the Fight for Free Enterprise by Arthur C. Brooks

This Book Review of The Road to Freedom: How to Win the Fight for Free Enterprise by Arthur C. Brooks is brought to you from Derek Leist from the Titans of Investing.

Genre: Economics
Author: Arthur C. Brooks
Title: The Road to Freedom: How to Win the Fight for Free Enterprise (Buy the Book)

Summary

Following the 2008 Great Recession and ensuing resurgence of neo-Keynesian economic policies favored by politicians and government bureaucrats, a need has arisen for a defensible moral argument in favor of the free enterprise system of America’s heritage.

In The Road to Freedom, Arthur Brooks lays out this moral argument for free enterprise by providing clear, quantifiable polling and historical data in an attempt to outline the future path to prosperity that awaits an American “system that is morally legitimate, not just efficient.” By breaking down equitability into what he describes as redistributive fairness and meritocratic fairness, Brooks is able to successfully argue that fairness is not simply equality in material wealth but rather in the chance for earned opportunity.

“Fairness means matching reward to merit…[where] forced equality is inherently unfair.” It is this strong conviction in an American “opportunity society” that drives Brooks in his moral argument for free enterprise and which he believes will ultimately lead to a stronger, happier, and more prosperous American future.

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In the first part of the book, Brooks lays out his moral argument in support for free enterprise and explores the reasons behind why such an argument must be made. The rapid expansion of government as a percentage of the American economy indicates a trend toward an unsustainable social welfare state and, eventually, forced austerity that would cripple economic growth, much as it has in Europe.

In trying to prevent such an outcome, most proponents of the free enterprise system have argued on the side of economic efficiency, but such arguments can be easily dismissed as “materialistic,” thus necessitating a different tact – one that directly promotes the moral legitimacy of the free market system.

To back up his assertion, Mr. Brooks describes some key ideas that point toward the moral legitimacy of free enterprise. The first is that polls and studies have shown that people are only truly happy when they feel they have earned their success. Entrepreneurs, for instance, indicate significantly greater life satisfaction than lottery winners.

Only in a free enterprise system can citizens pursue this deep level of happiness, rather than the “learned helplessness” engendered by receiving government benefits. Mr. Brooks also points to polling data that backs up the intuitive notion that true “fairness” is only reached when reward matches merit or effort. Forced equality, or “redistributive fairness,” is not actually fair or moral at all.

Also supporting the morality of free enterprise is the widespread misery and suffering in places where it is curtailed. As centuries of economic history have shown, spreading free markets to poorer countries will do more to aid their citizenry than any poverty relief program could ever hope to.

Having made the moral case for free enterprise, Mr. Brooks goes on to explore the application of his ideas to modern America. He describes the country’s relationship with its government today as the “statist quo” in which increasing proportions of the population are dependent on government programs to which fewer and fewer are contributing.

Government handouts are popular, but a system that is reliant on a combination of borrowing and taxes levied on a shrinking, concentrated pool of taxpayers is in desperate need of reform. This is not to say that government intervention has no place in society – Brooks catalogs several instances of market failures such as monopolies, negative externalities, and information asymmetries, where the government can provide a useful economic role – but that the fundamental relationship between the government and people as it stands today needs to be dramatically altered.

To fix this relationship and return American economic growth to a healthy level, Brooks lays out several issues that must be resolved. They include reforming the tax code, getting the government out of picking winners and losers in business, reducing government debt levels, lowering regulatory hurdles, and fixing the bloated entitlement system.

The most important issue we face as a nation is the choice between two competing ideas of America. The first is premised on the idea that the success of our nation “resides with government.” Not only is this idea fundamentally wrong on economic grounds but also raises deep moral issues, as well.

We have witnessed the failure of this “European-style social democracy” throughout the 2008 financial crisis, as well as today during the continued socio-economic troubles and austerity measures occurring on the European continent.

On the other hand, the other dream for American prosperity is founded on “free enterprise – the system our Founders left us to maximize liberty, create individual opportunity, and reward entrepreneurship.” This system of free enterprise that encourages “hard work and personal responsibility” is not always politically expedient.

It requires tough decisions and no free handouts. But America is better because of it – on the grounds of social and economic prosperity. “Free enterprise teaches us to earn success, not learn helplessness. It rewards merit, which is the fair thing to do. And in the end, it is the only system that can improve the lives of literally billions of poor people – here and around the world. These are the reasons I believe free enterprise is the only moral choice for America.”

INTRODUCTION

Following the 2008 Great Recession and ensuing resurgence of neo-Keynesian economic policies favored by politicians and government bureaucrats, a need has arisen for a defensible moral argument in favor of the free enterprise system of America’s heritage.

In The Road to Freedom, Arthur Brooks lays out this moral argument for free enterprise by providing clear, quantifiable polling and historical data in an attempt to outline the future path to prosperity that awaits an American “system that is morally legitimate, not just efficient.” By breaking down equitability into what he describes as redistributive fairness and meritocratic fairness, Mr. Brooks is able to successfully argue that fairness is not simply equality in material wealth but rather in the chance for earned opportunity.

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“Fairness means matching reward to merit…[where] forced equality is inherently unfair.” It is this strong conviction in an American “opportunity society” that drives Mr. Brooks in his moral argument for free enterprise and which he believes will ultimately lead to a stronger, happier, and more prosperous American future.

Freedom lays out an excellent moral argument on behalf of the free enterprise system that is rooted in America’s very founding.

By investing in America’s entrepreneurial citizenry, incentivizing individuals to take calculated risks, and promoting a society that rewards hard work based on merit, we are all better off. Furthermore, in maintaining and supporting an American opportunity society founded on the principles of free enterprise, we guarantee the possibility of a prosperous future for generations of future Americans.

PART I: MAKING THE MORAL CASE FOR FREE ENTERPRISE

Why Make the Moral Case for Free Enterprise?

“Government spending at all levels (federal, state, and local) amounted to 15 percent of GDP in 1940. In 1980, it was 30 percent. By 1990, it was 32 percent. Today, it is 36 percent.” Inefficient government agencies and an increasingly bloated government bureaucracy have been instrumental in the rise of the modern Leviathan of big government.

As government spending continues to play an even larger role in America’s GDP, government creep will continue to put pressure on the private sector. This crowding out effect is not only harmful to the competitiveness of American businesses in the global marketplace today. It can also be seen as a sign of future weakness in an already sputtering American economy.

Many people believe that this Leviathan of big government will “inevitably lead us to one of two places: social democracy or long-term austerity. ” In the former state, the US government would eventually be left over- promised and over-extended.

Our government would be burdened with expensive, indulgent social welfare promises like those of Norway or Holland. Eventually, with the current lackluster rate of growth of the American economy and aging population, this overburdened American welfare state would collapse with disastrous consequences for America’s future.

In the latter scenario, bloated spending would still be unsustainable and the citizenry would be forced to undergo measures of austerity (think Greece, Spain, Portugal, and Ireland). Clearly, neither of these options offers a viable path for a vigorous American economy in the future.

But what is free enterprise? It is “the system of values and laws that respects private property and limits government, encourages competition and industry, celebrates achievement based on merit, and creates individual opportunity.” This is the opposite of statism, which often advocates that government should lead economic activity as the fairest arbiter.

Surely, knowing America’s historical roots in the free enterprise system and the track record of economic empowerment that has accompanied this system must embolden policy makers to advocate free enterprise. So with a mounting fiscal cliff, why has America been caught in such a perilous recovery? “Why is the government today so bloated, so powerful, and so imperious? Why do Americans acquiesce to almost every expansion of government?”

The answer may be paradoxical but it is not a mystery – people like government handouts when they personally benefit but dislike government waste when that benefit goes across the county. “No single [handout] is enough to bring down the system. But add them all up, and here we are: 81 percent dissatisfied [with the handling of the American government].”

Some may say that it is time that America hear a “more forceful argument than ever before about the economic superiority of free enterprise…in other words, capitalism’s advocates need to yell louder that free enterprise makes us richer than statism.” But this argument for free enterprise has been made and has failed to stunt the rise of big government.

This argument, based on materialism, leads to disillusionment for the Have-Nots and Want-Mores. In political parlance, it lays open the heartfelt redistributionist argument that free enterprise is a cold, nepotistic, machinated system. Therefore, we must “demand a system that is morally legitimate, not just efficient…The dogged reliance on materialistic arguments is a gift to statists. It allows them to paint free enterprise advocates as selfish and motivated only by money.”

In the Declaration of Independence, Thomas Jefferson explicitly states the right of every man to pursue happiness.

But “the Founders did not promise happiness itself, only its pursuit, leaving it to us to define happiness any way we see fit, matching our skills with our passions. This was the moral promise of the nation to its people: the promise of life and liberty that would allow the possibility of self-realization to a virtuous people.”

Our understanding of free enterprise is thus not born out of some misguided, material richness but rather a sense of what is right that helps us thrive as one people, one nation.

A System that Allows Us to Earn Our Success

According to years of Gallup polling, “entrepreneurs of all types rate their well-being higher than any other professional group in America.” They also work more (nearly 49% of the self-employed worked more than 44 hours of work per week) and make “19% less” in monetary terms than government managers. Why are they such happy people?

The answer is not money. Countless studies have shown that the opportunity cost of money drops tremendously and brings little extra joy to life once a sufficient yearly income has been attained. The answer is that the free enterprise system endows us with what we truly crave: earned success.

A research study at the University of Michigan tested this principle by studying major lottery winners to determine “how much happier the winners were after they had struck it rich.” The results were dismal. Winners experienced a temporary happiness boost right after cashing in on their big payday but this quickly subsided.

“As time passed, they found they were actually worse off in happiness than before they had won. Not only did the novelty of buying new things wear off, but the simple things in life (like chatting with friends or walking in a park) were less pleasurable than before they had won millions of dollars.

In this case, these people had been endowed with millions of dollars for luckily guessing the right numbers on their lotto card but had not truly earned their success like the entrepreneurs above. People adapt to new economic circumstances incredibly quickly and “are excellent at perceiving changes to their surroundings or circumstances; they’re not so good at sustaining any special sensation from the status quo.”

In economics, economists refer to this tendency to adapt as the “hedonic treadmill.”

A study in 1978 by the University of Connecticut highlighted this principle. Researchers presented a group of adults with a list of twenty-four big-ticket consumer items (i.e. a car, house, swimming pool, etc) and asked how many items the participant currently possessed. They also asked, “when you think of the good life – the life you’d like to have – which of the things on this list, if any, are part of the good life as far as you are personally concerned?”

Overall, nearly everyone was in agreement that the good life required a lot more goods than what they currently possessed. Among the age cohort of 30 – 44 years old, the average number of items owned was 2.5. Their ideal number was 4.3. In 1994, these same people were presented with the same list. Naturally, most people now had more items with an average of 3.2 on the list.

But their requirements had shifted too. They now said they would need 5.4 items to have the good life. In other words, the good life was not any closer than it had been in 1978. “The more stuff people have, the more they want.”

This is why earlier we outlined that a moral argument for the free enterprise system cannot be made solely on increasing material gain. People do not crave material goods. They crave earned success, “the ability to create value with your life or in the lives of others.

It does not come from a lottery check or an inheritance…To earn your success is to define and pursue your happiness as you see fit. It’s the freedom to be an individual and to delineate your life’s ‘profit’ however you want.” Joseph Schumpeter, the godfather of modern entrepreneurship, had this to say about entrepreneurs and the entrepreneurial spirit:

“The financial result is a secondary consideration. It is, however, an index of success and…a symptom of victory.”

However, earned success has a flip side to it: learned helplessness. This is an important concept to understand in today’s society with more and more people moving to welfare and food stamp benefits. Surely, the government must offer some fall back support to struggling families.

However, how can these programs be moderated so as not to undercut the determination of the individual to earn success while also not driving him/her to a state of learned helplessness where “rewards and punishments are not tied to merit”? For most people, being simply productively active is not enough.

To truly earn success, people must have options and must be able to “choose their own paths and have a chance at finding the work that matches their passions with their talents.” That is why the U.S. has always been a magnet for driven, entrepreneurial minded people from other parts of the world who want to transform their lives.

We have created a society of opportunity-seekers who are able to match their skills with their passions. “Earned success, not materialism and government redistribution, is the way to understand the Founders’ moral promise of the pursuit of happiness in America today…Free enterprise is therefore not an economic imperative; it is a moral imperative.”

A System that is Fair

Imagine that you have four kids and they, like all good siblings, fight a lot. One day they are sitting in the kitchen when they notice that there is only one cookie left. The argument would probably sound something like:

Cyril Jr.: “I want the last cookie!”
Brent Jr.: “No, I should get it!”
Eduardo Jr.: “But that’s not fair – you already had two, and Cyril and I had only one!”
George Jr.: “Yes, but Brent and I helped Mom make them!”

This may seem like an innocuously everyday argument at the Titans household but the point here is that the kids are arguing over a definition of fairness, not simply a cookie. Two see fairness as meaning equal cookies. Two see fairness as meaning earned cookies.

In short, there are two definitions of fairness being thrown around today. Redistributive fairness regards fairness as meaning equalized rewards. Inequality is inherently unfair. On the other hand, meritocratic fairness regards fairness as meaning matching reward to merit. Forced equality is inherently unfair.

The real question for policy makers then is not does fairness matter but which type of fairness should be used in crafting public policy initiatives.

In a 2006 World Values Survey, a large sample of Americans were asked to consider the following scenario: Imagine two secretaries, of the same age, doing practically the same job. One finds out that the other earns considerably more than he/she does. The better paid secretary, however, is quicker, more efficient and more reliable at the job. Is it fair or not fair that one secretary is paid more than the other?

The overwhelming reply from respondents was that it was fair to pay the better secretary more (88.6% of respondents). “When people do not perceive resources to have been earned, they think it fair that the resources be split somewhat evenly…[however] when merit is involved (as in the case of the two secretaries), people believe that unequal rewards are fairer than equal rewards” when apportioned according to individual contribution.

“Most of us understand that some redistribution is necessary to pay for a functioning government. But relatively few believe that the resources people earn should be redistributed to help equalize incomes.” Aristotle put it best when he said that the worst form of inequality is to try to make unequal things equal.

Thus, the focus of our moral argument for the free enterprise system should be refocused from material wants and defining fairness towards “whether America is an opportunity society – if, in fact, people have the chance to work harder, get more education, and innovate – then rewarding merit is fair, and for some people to make more money than others is good and just.”

Mr. Brooks goes on to make the case that “mobility is significant and has remained stable over time” in America, writing that “the data simply do not support the idea that the deck is hopelessly stacked against the poor.” In a 2005 Syracuse University study, respondents overwhelmingly responded by 71.3% that “everyone or most people have an opportunity to succeed” in the United States. The General Social Survey is also cited as an example that 60 – 70% of Americans believe that “hard work” is the dominant reason most people succeed in the United States compared with just 16% who say that success is largely driven by “lucky breaks.”

My only qualm with Mr. Brooks’ data in A System that is Fair is that it is largely normative polling data. I wish that he would have included more positive data. For example, data gathered on reading level attainment across socially diverse school districts as a measure of teaching efficacy in literacy. It is important that as Americans we understand that the opportunity to succeed in life is available through hard work and determination.

My main concern is that this door remains open to the children in Houston’s third ward just as much as the children growing up in the High Land Park area of Dallas. Abraham Lincoln promised, “When one starts poor, as most do in the race of life, free society is such that he knows he can better his condition; he knows that there is no fixed condition of labor for his whole life.”

Mr. Brooks and I agree that we must build our society on our values of “hard work and self- discipline…Otherwise, we have no incentive to be industrious, honest, innovative, and optimistic…If people believe that economic outcomes are a product of luck, birth, connections, or corruption, they demand more and more forced wealth redistribution.” The redistributive goal of economic sameness is not the answer.

To get sameness, someone (i.e. the government) has to “decide what and how much to take from whom and how to redistribute it…America does not have a perfect opportunity society. But if we want to move close to that ideal, we must define fairness as meritocracy, embrace an economic system that rewards merit, and work tirelessly for more equal opportunity for all, rich and poor alike.”

A System for Good Samaritans

“People have a duty to help those in need – not only those close to them, but also strangers…Preoccupation with our own affairs is no excuse for ignoring the vulnerable…” But how can this principle of charity and caring be accounted for in a capitalist system that incentivizes avarice and selfishness as favorable characteristics of high business acumen?

The answer is simple: “while free enterprise may create significant income inequality, it actually helps everyone.” As Senator Marco Rubio of Florida once remarked, free enterprise has delivered more people from poverty than the totality of government anti-poverty programs.

To better understand this concept, we can look back at one of the most important eras for modernization in western society: The Industrial Revolution. The primary beneficiaries of the Industrial Revolution were not the richest members of society but the poorest.

“The Industrial Revolution’s accompanying economic and social benefits were the greatest antipoverty program ever known…The sudden emergence of free enterprise (what philosopher Michael Novak calls democratic capitalism) unleashed human creativity and ingenuity and brought about a previously inconceivable surge in living standards.”

The social and economic successes of the past two hundred years for countries that underwent the Industrial Revolution has led to an unprecedented emergence of free societies and markets. And where has economic and social growth been most stunted? The answer is unsurprising – the countries where free enterprise has been most elusive.

In countries like Burundi and the Democratic Republic of the Congo “trade is restricted, property rights are weak, and markets are subverted by the government…Low borrowing and investment means little to no accumulation of capital, weak business formation, low job creation, and virtually no economic progress.”

And more examples abound throughout history – think of the economic rise of South Korea versus the stagnation of its northern counterpart or the stunted growth of the German Democratic Republic versus the growth in prosperity of the Federal Republic of Germany throughout the cold war.

“The problem is not that there is unequal distribution of money in the world. The problem is that there is unequal distribution of free enterprise.”

To further this point, data is examined comparing the poorest citizens of the richest societies and poorest societies in the world. Data shows that the poorest 10% of citizens in the freest twenty countries earn about six times more than the poorest 10% in the least-free countries. Critics often complain that capitalism allows some people to get much richer than others, leading to the kind of income inequality that spawned the Occupy Movement last Spring. And they are right – to an extent.

Economic inequality in the US is much greater than in a country like Cuba. But surely this argument is not valid. “Would you rather live in a place where everyone is very poor (except, maybe, a handful of kleptocrats who run the government)?” Or in a society “where everyone has a fairly high, basic standard of living , a handful of people have a lot more than others, and if you work hard and get lucky, you can join them?”

Capitalism and free enterprise have lifted up everyone. The protestors of the Occupy Movement, “as privileged Americans, are part of the world’s 1%…In dealing with poverty here and around the world, welfare and foreign aid are a Band-Aid. Free enterprise is a cure.”

PART II: APPLYING THE MORAL CASE FOR FREE ENTERPRISE

Facing the Facts About America’s Statist Quo

“A drift toward statism has happened so gradually that most haven’t noticed it…which is why 81% say they are dissatisfied with the way the nation is being governed.” Its time that this issue be addressed. There is no excuse for a government of the people, by the people, and for the people to be so poorly governed that over 2/3 of the citizenry become disillusioned with its’ intensions.

In a recent 2011 Gallup Poll, nearly “60% of Americans strongly agreed that entrepreneurs are job creators.” Likewise, in an early 2010 Washington Post-ABC News Poll, Americans overwhelmingly with 58% approved of a “smaller government with fewer services [compared to a] larger government with more services.”

So what does this mean for America’s future road to prosperity? And what are the consequences for our current statist quo? “In the long run, social democracies can produce dysfunctional governments and unstable economic and social situations like those in Spain, Greece, Portugal, and Italy – all of which are now being crushed under a burden of debt after years of profligate government spending but modest national output.”

Surely, Americans do not favor a social democratic path to financial ruin and national bankruptcy so the question remains: How can we encourage economic prosperity while supporting the equal opportunity society necessary to continue on the road to freedom?

To begin to understand the answers to this question, we must begin by examining the American tax code.

In a 2011 NBC News / Wall Street Journal poll, 56% of Americans prefer a graduated income tax system.” However, in 2009, 46% of Americans paid no federal income tax! Effectively, “for nearly half of all households in America, federal government services, from the US Army to the space program, are free.

In fact, more than half of nonpayers pay less than zero: 30% get a refundable credit, meaning they get a check from the government for more than they paid in.” This is not a system that encourages people to hold government accountable for inefficiencies and wasted spending.

According to the Tax Foundation, “66% of Americans believe that everyone should be required to pay some amount of federal taxes,” which leads us to a troubling social democratic fact: “The majority of Americans today consume more in government services than they pay for in taxes.”

Advocates of tax redistribution policies often complain that the income distribution in America is increasingly lopsided. For example, the top 5% of American wage earners today earn nearly 35% of total national income. However, what is excluded from that statistic is the fact that these top 5% of wage earners also pay nearly 60% of all federal income taxes.

This is an enormous contribution to the functioning of our federal government that is currently oozing with debt. “As of December 2, 2011, America – the richest nation in the history of the world – owes its creditors $15,101,125,095,514.72.” To put that into perspective, that is roughly $48,290 of debt owed by every single American to foreign governments like China and Japan (our two biggest creditors).

“Social democracies cater to voters by lavishing government services on them…Naturally this means focusing on the current generation’s wants with little regard for future generations.” This is why former British Prime Minister Margaret Thatcher is famously reported to have said that the problem with socialism is that eventually you run out of other people’s money.

“Social democracies sacrifice robust economic growth for a strong welfare state and income equality.” This is not a disputed fact. This is the essence of the idea of social democracy – sacrifice future real growth driven by the private sector for current government supported social benefits. The problem is framed as an equality, socio-political issue by politicians but the real problem arises in the economic growth that is stifled in this tradeoff.

“Studies vary in their conclusions, finding that every government job created eliminates between 1 and 2.2 private sector jobs. In other words, the labor effect of government growth is in the best case neutral, and in the worse case hugely destructive.”

When we look back at American economic growth over the past fifty years and smooth out all the ups and downs of the business cycle, we find that “America’s growth has been generally falling.” This is alarming and is due in part to the short-sighted taxation and social policies that are crushing America’s free enterprise system. Social democracy is not the answer for a vibrant, prosperous American future. Effectively, “social democracy pulls the economic ladder up behind us.”

The Government We Want: Uncle Sam or Uncle Sugar?

“Left on their own, governments tend to grow. Politicians get attention – and applause – for doing things.” Over the years, both Democrats and Republicans have contributed to our bloated national debt and government waste. We must be careful to not lose sight of the “wise and frugal Government” that was envisioned by Thomas Jefferson and our Founding Fathers.

So “what philosophy of government preserves Jefferson’s ethos, while recognizing that the world has changed in dramatic wars?”

According to Mr. Brooks, the philosophy espoused by Nobel laureate Frederick Hayek in his book The Road to Serfdom should be “obligatory reading for all advocates of free enterprise.”

Hayek was not anti-government, however, as some people are apt to portray him. “He taught that the government, for moral as well as efficiency reasons, can and should provide a minimum basic safety net for citizens. And like most other economists, he also believed it should address market failures. But that’s all – and that is dramatically less than what the government currently does.”

The problem with the American safety net is that is has become appallingly broad and created a system of dependency among the most in need members of society. A safety net for the poor should not be misconstrued as a “means to increase material equality…[or] a way to pass out rewards to groups based on demographics or political clout, or a source of benefits to the middle class.”

Mr. Brooks then goes on to identify “four sources of market failure: monopolies, externalities, public goods, and information asymmetries” that may justify government intervention in the market place. Most egregiously, the “lack of competition” that characterizes monopolies seems to stand out as a grave “threat to economic prosperity and the good of citizens.”

Less competition “means prices tend to be high, service tends to be poor, entrepreneurs are unable to deliver innovation to consumers, and companies spend an inordinate amount of money lobbying government to maintain the one-seller privilege.” The 1880’s pricing schemes by the Standard Oil monopoly is referenced in this regard as an example of the negative forces of monopolistic competition.

Likewise, government attention should be concerned with price fixing through the collusion of competitors that can create effective joint monopolies to manipulate competitive markets. However, Mr. Brooks does not concede that all monopolistic competition is bad.

To make his case, the author argues that the protection of intellectual property rights is a necessity to encourage research and development spending. In effect, these patents and trademarks legalize temporary monopolistic production of a newly developed product with the long-term goal of promoting healthy economic competition in the marketplace.

The case of externalities is also examined. “Externalities are things that affect your well-being outside the realm of prices and free markets.” They can be positive (e.g. the social benefits of living in a civically engaged community) or negative (e.g. living next to a polluting factory). In general, Mr. Brooks proscribes himself to “the Coase Theorem,” which essentially argues that “private bargaining works at least as well as government action to solve externality problems, if property rights are clearly defined.”

However, negative externalities may require government intervention in the case of certain private sector activities that adversely affect society, whereby society is unable to effectively protect its interests.

Finally, the case of public goods and information asymmetries are examined. “To defend the nation at the current level [of government defense spending], the average American would have to pay $2,462 for national defense. Assuming, most Americans wouldn’t pay that, what would happen to the national defense?”

The same reasoning can then be applied to your local police and fire departments or the upkeep of city roads that allow for ease of mobility. National defense, fire protection, law enforcement services, and many other things are public goods.

“They are things we want and need, but which we can’t practically exclude people from using if they don’t pay… Public goods can make markets fail because private sellers will underprovide them when people refuse to pay.” In these instances, governments must act to mobilize its’ resources to provide for the defense of its citizenry and the free enterprise system.

The same goes for information asymmetries, famously expressed in economist George Akerlof’s essay entitled The Market for Lemons. “He took the example of used cars, in which the dealer knows the lemons from the good cars, but buyers don’t, and showed that the whole market can stop functioning as a result.”

Likewise, insider trading and Wall Street Ponzi schemes are effectively the exploitation of information asymmetries.

Few would argue (except perhaps Bernie Madoff) that the government should not play a major role in providing oversight for investors against these sorts of activities. However, “regulation is not the only – or sometimes, the best – way to solve the problem.” The commonplace advertising of money-back guarantees (beginning in the 1960’s retail market) is just one example of the private sector sorting out information asymmetries in order to gain “a competitive advantage by signaling to customers that they could be trusted.”

“There are many, many cases in which there is a source of market failure but the market works just fine because people solve the problems themselves, without any government action at all… In providing a minimum safety net or addressing market failures, the government [often] wastes resources or tries to do things it cannot achieve cost effectively.”

Most importantly, however, societies need well-functioning markets and a healthy culture of social capital “that promotes voluntary activity to meet challenges in civil society.” This requires a climate of trust and voluntary action, which presupposes that America’s opportunity society continues to flourish and provide equal opportunity for America’s youth. “In other words, if people are to flourish, they need incentives and the ability to help each other voluntarily.”

Winning The Moral Debate on the Policy Issues that Matter Most to Americans

“Polls have repeatedly revealed that when it comes to domestic policy, Americans are primarily concerned with a core set of topics, almost all of which revolve around economics.” In a June 2011 CNN poll, “the most important issues were, in order: the economy, unemployment, health care, the deficit, gas prices, terrorism, taxes, and the Medicare entitlement.”

Five of the top eight directly center around economics and roughly two of the other three are very closely related to economic policy. In order to make a moral argument for the free enterprise system, these issues must be addressed morally and practically in a “broader set of policy solutions.”

ISSUE 1: GETTING THE U.S. ECONOMY GROWING AGAIN

Economic growth is a moral issue. In the words of Harvard economist Benjamin Friedman, “Economic growth…fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy.”

All of these issues have deep moral implications on societal well-being. By “consuming tomorrow’s growth today in the form of exploding government and lavish entitlements we can’t afford,” we are weakening future economic prosperity for our children, our children’s children, and our grandchildren’s children. “Growth today means a better life for the future. Every 1% of additional growth today will double real incomes seventy-two years from now.”

With this moral imperative in mind, Mr. Brooks then lays out economic policy measures to improve on America’s sluggish economic growth rate:

  • Firstly, fixing “the tax code is a top priority…At a minimum the US should drop the top federal corporate income tax rate to no more than 25% from the current 35%.” By maintaining such high corporate taxes, the US is internationally uncompetitive, which discourages corporate investment at home. In addition, Mr. Brooks suggests that “the US should replace the current income tax with a consumption tax to stop discouraging [domestic] investment.”
  • Secondly, the US should “lower regulatory barriers to business” at home. The Dodd-Frank Act is cited as a regulatory response to a crisis that has “created new sets of damaging rules for companies large and small.” However, Mr. Brooks concedes that proper regulation that addresses the heart of the concerned market issue is necessary to the functioning of a free market system. In the 2008 financial crisis, the housing crisis “occurred because people borrowed too much to buy houses, with down payments that were too low. Without a sufficient down payment, people had an incentive to walk away from their mortgages…To mitigate the risk of another collapse of this sort, America doesn’t need 848 pages of legislation [spurred largely by special interests]. It needs a government that stops encouraging people…to buy houses they cannot afford.”
  • Thirdly, “in addition to tax cuts and regulatory reform, growth requires that government spending be capped and cut.” Mr. Brooks makes the point that evidence suggests a “10% increase in government spending and taxation has the effect of reducing economic growth by up to 1% per year.” There are three reasons for this economic slump caused by increase taxation and government involvement: “First, spending that is paid for with current taxes creates a drag on the private economy. Second, if spending is paid for by borrowing, this lowers the confidence of investors today who know that sooner or later it will have to be paid back. Third, when borrowed money is ultimately paid back, the taxes hurt growth in those future years…If there’s one thing entrepreneurs hate most about government, it’s unpredictability.”
  • Finally, “the US must get serious about immigration policy.” Most pundits and politicians are completely misdirected by focusing solely on illegal immigration. “They are ignoring the most destructive immigration policy of all: expelling foreign students and professionals after their student and temporary visas expire.” American immigration policy should encourage world leaders in science, technology, and academia to come our shores. “Recent research shows that for every immigrant with education in science, technology, mathematics, or engineering, 2.62 new jobs are created for native-born Americans.” By imposing draconian immigration measures on these hard-working, skilled workers, we are harming the potential prosperity of the American economy! And Mr. Brooks goes even further by demanding that “every student with a clean legal record who obtains a degree from an American university should automatically have the right to become a permanent resident.”

Every issue the author examines is unquestionably of vital importance to the success of a vibrant, innovative American economy now and in the future. Personally, I take issue with several policy ideas put forth by the author.

Briefly stated, I believe that the idea of abolishing the federal income tax in lieu of a higher consumption tax is contradictory to the idea of incentivizing the American citizenry to take a greater stake in the policies of their government. I believe the federal income tax code needs to be streamlined and graduated so that the tax burden is shared by all to each through his/her own means yet unbearable to none.

Furthermore, while I applaud Mr. Brook’s suggestion of offering permanent resident status to hard-working, contributing immigrants. I would be slightly more stringent in the university qualifications by considering immigrants in advanced science, technology, and engineering degrees for permanent residence status.

This way, immigrants are incentivized to aid American research and development programs, which gave American businesses and national defense technological advantages throughout the last century.

ISSUE 2: PUTTING AMERICA BACK TO WORK

When talking about job creation, we need to stay focused on three core principles: “first, the government is terrible at picking winners…Second, the government must guard against special interests…Finally, the government needs to keep its payroll to a minimum.”

Businesses will not hire during periods of excessive regulation, expansive public sector growth, labor market interference and tax complexity. These issues must be addressed! “Government tends to crowd out the more productive private sector when engaged in the same basic activities. Downsizing the federal workforce will increase net American employment.”

ISSUE 3: GETTING THE UNITED STATES OUT OF DEBT

This should come as no surprise to anyone who has recently picked up any financial newspaper. “Unless [American policy] reduces deficits and stabilizes government spending relative to the size of the economy, it will have just three choices: steal from future generations, inflate the currency to lower the real value of the debt, or refuse to repay those to whom it owes money.

All these options are immoral because they are unfair: They harm others who have done no hard to America.” The public debt is a moral issue, as well as, an economic one and it must be dealt with accordingly in a way that does not harm private businesses or personal consumption (i.e. through tax increases).

ISSUE 4: FIXING ENTITLEMENTS

“As any child knows, it is wrong to make promises you cannot keep…The promises politicians have made to their constituents have created massive unfunded liabilities in pensions and health care.” This is the basic moral problem with our burdensome entitlements system, “which has promised [Americans] more in benefits then they ever paid into the system.”

To have a fair and stable entitlements system, three principles must be adhered to: “First, entitlements should be a minimum basic safety net for the poor, not a source of retirement benefits for everybody…Second, entitlement policy should not create incentives for people to stop working and saving their money…Third, the system must create incentives for people to use public resources in a responsible way.”

America cannot afford to continue paying out more than our system takes in. The retirement age must be reexamined, benefits must be indexed to price inflation (rather than wage inflation), and means must be adopted to reduce benefits for high income retirees whose incomes “are so high that Social Security is not a major part of their retirement income.”

ISSUE 5: REFORMING THE TAX CODE

“Taxes should never be used to pursue social engineering objectives. The point of taxes is to raise the revenues necessary to operate the government…” According to Mr. Brooks, this means “lowering marginal tax rates” and “closing tax loopholes.” Furthermore, “the base of people who pay income taxes should be broadened.”

These steps are instrumental in beginning to streamline the 16,845 page tax code, which is riddled with special interest provisions from racehorses to mortgage interest deductions on homes. “Free enterprise is a matter of the heart even more than the head…public policy should first and foremost be an expression of values.”

THE ROAD TO FREEDOM

The most important issue we face as a nation is the choice between two competing ideas of America. The first is premised on the idea that the success of our nation “resides with government.” Not only is this idea fundamentally wrong on economic grounds but also raises deep moral issues, as well.

We have witnessed the failure of this “European-style social democracy” throughout the 2008 financial crisis, as well as today during the continued socio-economic troubles and austerity measures occurring on the European continent.

On the other hand, the other dream for American prosperity is founded on “free enterprise – the system our Founders left us to maximize liberty, create individual opportunity, and reward entrepreneurship.” This system of free enterprise that encourages “hard work and personal responsibility” is not always politically expedient.

It requires tough decisions and no free handouts. But America is better because of it – on the grounds of social and economic prosperity. “Free enterprise teaches us to earn success, not learn helplessness. It rewards merit, which is the fair thing to do. And in the end, it is the only system that can improve the lives of literally billions of poor people – here and around the world. These are the reasons I believe free enterprise is the only moral choice for America.”

HookedtoBooks.com would like to thank the Titans of Investing for allowing us to publish this content. Titans is a student organization founded by Britt Harris. Learn more about the organization and the man behind it by clicking either of these links.

Britt always taught us Titans that Wisdom is Cheap, and principal can find treasure troves of the good stuff in books. We hope only will also express their thanks to the Titans if the book review brought wisdom into their lives.

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