unleashing capitalism presentation
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Unleashing CapitalismUnleashing Capitalism
Russell S. Sobel, Ph.D.Russell S. Sobel, Ph.D.
Professor of EconomicsProfessor of EconomicsJames Clark Coffman Distinguished ChairJames Clark Coffman Distinguished Chair
West Virginia UniversityWest Virginia University
What Explains Prosperity?What Explains Prosperity?
Adam Smith’s Question:Adam Smith’s Question:Why Are Some Countries Rich and Others Poor?Why Are Some Countries Rich and Others Poor?
An Inquiry into the Nature and An Inquiry into the Nature and Causes of the Wealth of Causes of the Wealth of Nations (1776)Nations (1776)
Policies and the system of economic organization Policies and the system of economic organization (e.g., capitalism) matter more than things such as (e.g., capitalism) matter more than things such as resources, geography, education, etc.resources, geography, education, etc.
Rankings of Reliance on CapitalismRankings of Reliance on Capitalism
Growth is a function of “inputs” AND “institutions”Growth is a function of “inputs” AND “institutions”
West Virginia needs to get its “Institutions” in
better shape
North Korea vs. South KoreaNorth Korea vs. South Korea
Per Capita Income
= $1,800
Per Capita Income
= $24,200
We are less “free market” We are less “free market” than Estonia and Latviathan Estonia and Latvia
West Virginia Ranks West Virginia Ranks 5050thth in Capitalism in Capitalism
States also Differ in Reliance on Capitalism
Figure 1.1: Average Income by State, 2005
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
WV’s PCPI: Rank 48th – 75% of U.S. AverageWV’s PCPI: Rank 48th – 75% of U.S. Average
1934
1920193019401950196019701980199020002010
25
30
35
40
45
50
Pe
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ap
ita P
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on
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nco
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Ra
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West Virginia's Rank Among States
We Are Falling Behind Other StatesWe Are Falling Behind Other States
1965 PCPI Ranks: WV=42, GA=41, NC=45
Figure 1.3: State Growth Comparisons
$13,361 $13,900 $13,194
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
West Virginia Georgia North Carolina
Per
Cap
ita
Inco
me
1965 2005
1965 PCPI Ranks: WV=42, GA=41, NC=452005 PCPI Ranks: WV=48, GA=33, NC=35
Growth Rates: WV=1.4%, GA=2.0%, NC=2.2%
Figure 1.3: State Growth Comparisons
$13,361 $13,900 $13,194
$26,029
$31,191 $31,029
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
West Virginia Georgia North Carolina
Per
Cap
ita
Inco
me
1965 2005
Figure 1.2: Which Future for West Virginia?
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
19
25
19
35
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45
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65
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05
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Pe
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Inc
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Historical 1.4% Growth 1.9% Growth 2.4% Growth
What Faster Growth Means for Future What Faster Growth Means for Future ProsperityProsperity
Average income in West Virginia will reach $50,000 an entire generation Average income in West Virginia will reach $50,000 an entire generation earlier if we can increase long-run growth by just one percentage pointearlier if we can increase long-run growth by just one percentage point
How Can Policy be How Can Policy be Reformed to Better Reformed to Better
Embrace Capitalism and Embrace Capitalism and Promote Long-Run Promote Long-Run
Growth?Growth?Today I’ll give a “menu” of reforms in 5 major areas
1. Lower Taxes & Regulations on 1. Lower Taxes & Regulations on Productive ActivitiesProductive Activities
Examples:Examples:Capital InvestmentCapital Investment
Business franchise taxBusiness franchise tax Personal property tax onPersonal property tax on inventory, machinery inventory, machinery and equipmentand equipment
Labor ForceLabor Force- Welfare Reform- Welfare Reform
Earned IncomeEarned Income Spendable IncomeSpendable Income
$0$0$6,000$6,000$12,000$12,000
$11,026$11,026$11,014$11,014$15,286$15,286
2. Discourage “Unproductive” Uses 2. Discourage “Unproductive” Uses of Resourcesof Resources
(e.g., excessive lobbying or lawsuit abuse)(e.g., excessive lobbying or lawsuit abuse)
Examples:Examples:
Legal ReformLegal Reform Venue RequirementsVenue Requirements Joint & Several Liability ReformJoint & Several Liability Reform End Partisan Election of JudgesEnd Partisan Election of Judges
Avoid targeted taxes, credits, & Avoid targeted taxes, credits, & subsidies - they encourage lobbyingsubsidies - they encourage lobbying
3. Rely on Entrepreneurial Discovery, Not 3. Rely on Entrepreneurial Discovery, Not “Central Planning,” to Guide the State Economy“Central Planning,” to Guide the State Economy
An economy undergoes continuous change An economy undergoes continuous change – – some industries fail, others are bornsome industries fail, others are born
Capitalism critically relies on entrepreneurship and Capitalism critically relies on entrepreneurship and the profit and loss system to direct this processthe profit and loss system to direct this process
This process cannot be centrally planned or directed This process cannot be centrally planned or directed effectively - it must be effectively - it must be discovereddiscovered within the within the marketplacemarketplace
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:To Promote & Unleash Entrepreneurship:
Avoid interfering with the profit/loss mechanismAvoid interfering with the profit/loss mechanism
Avoid regulating prices or wagesAvoid regulating prices or wages
Privatize or induce choice whenever possiblePrivatize or induce choice whenever possible
Don’t impose barriers to entering occupations & Don’t impose barriers to entering occupations & industriesindustries
Barriers to EntrepreneurshipBarriers to Entrepreneurship
4. Reduce Government Size, 4. Reduce Government Size, Growth, and CentralizationGrowth, and Centralization
Goal should be to increase the share of our Goal should be to increase the share of our state economy controlled through the private state economy controlled through the private sectorsector
An important first step is to constrain future An important first step is to constrain future state spending growthstate spending growth
Growth of WV State Govt.Growth of WV State Govt.
1860 1880 1900 1920 1940 1960 1980 2000$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
West Virginia Real Per Capita State Spending
1921 B&O Tax Adopted – Converted to Bus Franchise Tax 1987
1933 Consumer Sales Tax Adopted
4. Reduce Government Size, 4. Reduce Government Size, Growth, and CentralizationGrowth, and Centralization
Goal should be to increase the share of our Goal should be to increase the share of our state economy controlled through the private state economy controlled through the private sectorsector
An important first step is to constrain future An important first step is to constrain future state spending growth state spending growth
Overall spending can also be reduced and Overall spending can also be reduced and made more effective by decentralizing made more effective by decentralizing spending to local governments (WV is 2spending to local governments (WV is 2ndnd most centralized state)most centralized state)
5. Increase the Security of Property 5. Increase the Security of Property Rights & Impose Checks on the Rights & Impose Checks on the
Regulatory EnvironmentRegulatory Environment
Restrict the use of eminent domain for Restrict the use of eminent domain for private redevelopment (post-private redevelopment (post-KeloKelo) ) (H.B. 4048 was passed in 2006 but it didn’t go far enough)(H.B. 4048 was passed in 2006 but it didn’t go far enough)
Regulations should be subject to cost-Regulations should be subject to cost-benefit analysis (and include sunset benefit analysis (and include sunset provisions based on proof of effectiveness) provisions based on proof of effectiveness) - Ex. Mine Safety, ATV- Ex. Mine Safety, ATV
Thank You / Q&A
Contact Information:
Russell S. Sobel, Ph.D.Coffman Distinguished Chair
Dept. of Economics, WVU
Russell.Sobel@mail.wvu.edu
(304) 293-7864
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