The editor’s opinion from Marketplace, Northeast Wisconsin’s business magazine. (Obligatory disclaimer: Most hyperlinks go to outside sites, and we’re not responsible for their content. And like fresh watermelon, peaches, pineapple, grapefruit, tomatoes and sweet corn, hyperlinks can go bad after a while.)

April 10, 2008

Marketplace of Ideas Greatest* Hits: The way things should be

Reprinted from Marketplace April 29, 1997

Since this blog is a new venture, I thought I would reprint this Marketplace of Ideas column, all 1¾ pages of it in Marketplace’s old 9 × 12 size, in which I laid out this column’s guiding principles. A few years have gone by since I wrote this, so footnotes are indicated by the small numbers.

The Journal Communications companies, including Add Inc1, publisher of this magazine, are creating vision and mission statements for each of our publications — a process with which readers certainly are familiar.

Along that line, I thought I would take this space to discuss what I’ve learned about business, in both the three years I’ve been at Marketplace2 and my 1½ years in business before that. I’ve put what I’ve learned into this column’s guiding principles, so to speak. This is what Marketplace of Ideas believes:

Profit is a noble aim, and profitable businesses create a prosperous environment and lifestyle. This idea comes from Marketplace’s first editor, Jonathan Drayna3. It simply means that Northeast Wisconsin wouldn’t be as good a place to live without the contributions of business. Striving for profit leads to innovations in products and services, which benefits both a business’ customers and its employees. Healthy, profitable businesses means owners — both business owners and corporate shareholders — make money, and employees stay employed and make money. There are side benefits too, but that’s best addressed in the next point …

Making profits is the number one priority of a business. Marketplace reports on businesses that have given their employees unique benefits or made valuable contributions to the community — JanSport’s child care center4 and Wisconsin Label Corp.’s Share the Wealth program are two examples. But no business can do anything for its employees or the community without making money. In fact, economist Herbert Stein believes the sum total of a business’ social responsibility is maximizing profits, and it can be said that the two previous examples allow those companies to attract the best and most efficient employees, thus maximizing their profits.

Big business and small business have more in common than what separates them. This point was contradicted during early 1990s health care reform proposals; the changes that were proposed benefitted big companies at the expense of small employers. But all big companies started out as small companies, and what government does affects all companies; it just affects small companies more. Government operates on trickle-down effects — anything it makes big businesses do, it eventually will make small businesses do.

Free markets, free trade, free people. Protectionism and subsidies only prop up businesses that aren’t successful enough to survive on their own. The only way markets really work is if people are free to choose what products or services they want to buy. This is why China’s economy will never reach true superpower status until political freedoms accompany economic freedoms. That also is why the U.S. is the most powerful nation in the world. That also is why the Republican Party’s Pat Buchanan-directed swing toward protectionism is indefensible, and Clinton’s working for the passage of the North American Free Trade Agreement5 may be the only business-friendly accomplishment of his entire presidency. As author Ramesh Ponnuru puts it, protectionism “invites Big Government, Big Labor and Big Business to form a coalition to socialize the economy; free trade protects ordinary citizens from all of them.” That also is why business people should be wary about government proposals to tamper with the First Amendment through, for instance, regulating the Internet, because the right to own property is certainly part of the First Amendment — freedom of expression.

This is a liberal position — a classical liberal position, that is, as opposed to the form of government-knows-best liberalism the Democratic Party espouses. Government should protect people and property from violence and theft, as the Washington Post’s James Glassman once wrote, and protect the country from overseas military threats — and then butt out: “The government should not subsidize agriculture or home ownership or scientific research by corporations. It should not run railroads or power plants; it should not promote fuel made from corn … fund art projects or own 50 percent of land in the West. It should not redistribute income (though it should provide short-term help for the indigent). It should not operate a retirement or health care system. The goals may be worthy, but they can be achieved just as well by individuals, alone or organized voluntarily.”

The top priority of elected officials is a healthy economy. Government should work on the two areas that affect the most people — taxation and inflation — and do as much as possible, such as eliminating needless regulations, to put business in position to employ more workers and make profits. That would be more helpful to employees in these days of increased economic uncertainty than politicians blathering on about how they feel your pain6; economic downturns affect people on the margins first and foremost. Calvin Coolidge put it well: “After all, there is but a fixed quantity of wealth in this country at any fixed time. The only way that we can all secure more of it is to create more.”

Taxes should be used to pay for government services, not to redistribute income. The tax system should not be used to enforce social policy, either by high tax rates on the wealthy or by various kinds of tax breaks. Our federal tax system ultimately should eliminate corporate income taxes (which only contribute about 10 percent of total federal tax collections, according to the Treasury Department) and estate taxes (1 percent of tax collections), not penalize any one income group, not penalize investing or personal savings, and focus more on maximizing national income rather than tax revenue. Eliminating business taxes also would decrease the money-based political shenanigans going on in Washington6; eliminating tax breaks eliminates a reason for political contributions. The fact that, according to the Tax Foundation, we pay more in taxes than we pay for food, clothing and housing is sick.6

Politicians also need to realize the inverse effect between tax rates and tax collections. Annual tax collections since 1960 have totaled around 19.5 percent of the Gross Domestic Product, while the top income tax rate has been anywhere from 28 percent (in the good old 1980s) to 39.6 percent (the Clinton era) to 91 percent (the early 1960s).7 As investment analyst W. Kurt Hauser, who discovered the tax rate–tax collection nonrelationship, says, “19½ percent of a larger GDP is preferable to 19.5 percent of a smaller GDP.”

Hauser shows the difference between the target of a tax and the burden of a tax. The 1990 luxury tax on boats of $100,000 or more was targeted at wealthy boat buyers; the burden fell on those boat builders who went bankrupt and their employees who became unemployed, because the buyers either didn’t buy boats or bought them overseas. (The luxury tax also affected companies that built boats of less than $100,000 because potential boat-buyers assumed it applied to all boats; just ask Mercury Marine or Carver Boat Corp.) Capital gains taxes — which really are taxes on success, not wealth — may be targeted at the rich, but the burden of high capital gains taxes, Hauser says, falls on job seekers, because those taxes “prevent the economy from operating at its optimum level,” and on those who are “rich” in one particular year because of the sale of a home or a small business. Call it trickle-down taxation — rich people have access to tax shelters and other tax avoidance mechanisms the middle class cannot get, so if you raise taxes on the rich, you’re ultimately raising taxes on the middle class.

If the government really wants to help working people, in addition to the aforementioned economic concerns, the government needs to remove the disincentives our tax code has for working people. Besides ending the marriage penalty, the government could start by giving people the same tax advantage business has — for health insurance costs (self-employed people can deduct only part of health insurance costs, while businesses can deduct all their costs), personal investments (anyone who works for a company with a 401(k) plan8 can make tax-deferred contributions, but if your employer doesn’t offer 401(k)s you’re out of luck), and Social Security taxes (businesses can deduct them; individuals cannot, which makes it a highly regressive tax), to name three. The government also should remove the double taxation of capital gains (either by ending corporate taxes or by ending capital gains taxes) and the tax disincentive to save money, remembering that for individuals “savings” and “investments” really are the same thing.

Balancing the budget is important because of its benefits, not as an end to itself. The budget deficit is somewhat illusory because we are not charged the actual total cost for some government services. The national debt — the accumulation of years of deficit spending — is real, affecting interest rates and where government can spend money. As the debt grows, interest payments as a percentage of the budget grow, and the government’s continued borrowing raises interest rates, bumps other borrowers out of credit markets, and requires all other borrowers — including home buyers and business borrowers — to pay more, which in turn reduces spending on houses and business capital items, which in turn reduces business output.9 The deficit also means the government takes money in ways it shouldn’t — using, to name two examples, the Social Security and transportation trust funds not for their intended purposes, but to finance the government.10

The deficit should be reduced because everyone’s taxes are too high and government spends money where it shouldn’t — for instance, support of the arts and humanities and business subsidies. Eliminating the deficit by raising taxes enough to cover our $300 billion in deficit spending won’t work and would be a cure worse than the deficit disease. Few politicians want to admit that the real cause of the deficit is entitlement spending, but that’s the truth. More on that in the next point.

Government should have a very small place in the market. There obviously must be ways to punish businesses that engage in illegal or fraudulent activities. Government also can get involved in community projects, like Harbor Centre in Sheboygan or brokering the Burger Boat Co. sale (“The marine phoenix,” Marketplace, April 29, 1997), which can’t be done individually by business or government. But government shouldn’t be in the business of punishing businesses for doing things some politicians don’t like — be it layoffs, buying other companies to increase their market share, failing to give employees certain benefits, paying their CEOs too much money or whatever else — or encouraging businesses to do things government does like. President Clinton and Democrats are fond of talking about how we need to “invest” in education and job training, when those programs aren’t know for spending in the right places or working very well. In fact, they don’t seem to work well anywhere in the world — European countries, which have much higher tax rates and spend much more on welfare-type programs, also have much higher unemployment ratios, higher relative deficits, and less productive economies than the U.S.

Clinton and Congress would do well if they concentrated on Social Security reform6 and Medicare reform and nothing else for the rest of their terms, because those two problems — not too-low taxes or spending too much money on something — will doom us to escalating budget deficits (as in $1.7 TRILLION annually by 2030, by one estimate) if nothing is done about them.11 Government needs to realize that no government program can make the economy better; businesses and individuals affect what happens in the economy. That runs into the next point …

The best people to run a business are that business’ owners and management — not government, either through regulations that require businesses do certain things, or tax breaks to encourage businesses to do certain things. One important reinforcement would be the bill proposed in the 1995–96 Congress by U.S. Rep. J.D. Hayworth (R–Arizona) to require Congress to vote on all regulations executive branch agencies create — no more legislation by regulation.12

Protecting the environment is important, but not if it means excessive tradeoffs. Author P.J. O’Rourke points out that environmental protection is what economists would call a luxury good — countries with healthy economies can afford to preserve their environment; those with weak economies (name any former Eastern Bloc country) do not. Environmental protection, like most governmental functions, is best done at the lowest possible level. Environmental protection should be based on actual, rational science, not the hysterical pseudoscience (are you paying attention, Al “Earth in the Balance” Gore?13) that infests the environmental movement today. For instance, if the Crandon mine cannot be operated without degrading the environment (which beyond question is an important facet of Wisconsin’s economy) to a scientifically significant level, it should not be allowed to open. Approval of the mine should not be denied because of some people’s dislike of mining.14 People also should realize Earth is more durable than some environmentalists think; the massive oil spills resulting from the Persian Gulf war in 1991 did less environmental damage and were cleaned up much quicker than some environmentalists feared.15

Land use is related. To bemoan the gobbling up of pristine Wisconsin farmland for uses some people don’t approve of, such as houses and commercial development, is easy. Those people should put their money where their mouths are — if preserving farmland is so important, the way to do that is to buy farmland and preserve it, not tell farmers that they cannot determine the present or future use of their own land. If taxpayers want to preserve farmland, they should get out their checkbooks.

The most efficient governments privatize as much as possible and regionalize as much as possible. The point here is value for the tax dollar; Fox cities should wonder why the cities has eight separate police departments16 when one covering the area from Kaukauna to Neenah would do better.

Business people should support and contribute to elected officials and political candidates who support business, and oppose and work against those who do not support business. Otherwise, people like Supreme Court candidate Walt Kelly17 and former state Assembly candidate Tony Palmeri18, who called businesses “corporate monsters,” end up in office. As U.S. Rep. Pete Hoekstra (R–Michigan), one of the few people in Congress with an actual business background, put it in Industry Week Feb. 3, 1997, “Business has been ignoring for far too long what goes on in Washington” — and in Madison too, I might add.

Transportation spending should focus on roads first and foremost. Attempts to replace cars with mass transit — buses or commuter rail — are attempts to curtail the freedom we have to go where we please with whom we please when we please. Business cannot operate if sales or service forces are tied to the local bus schedule. More on this in a future Marketplace of Ideas.19

Solutions to our social problems are best found in business and the marketplace, not by creating yet another government program for every social ill. American Medical Security chairman Wally Hilliard20 once proposed a way to ensure that people who lose their jobs still get health insurance — tie health insurance to unemployment benefits, and increase unemployment taxes 0.75 percent to pay for the cost. The best welfare program is a job with a profitable, growing business.

Business owners and their employees should be able to associate and bargain with each other however they see fit. This means that private-sector employees should not be forced to join or associate with unions, or be barred from joining or associating with unions. (Note I wrote “private-sector employees”; I question whether public-sector employees should be allowed to unionize at all, since their jobs typically are protected by Civil Service anyway.)

Business people have a responsibility to themselves and others to do business legally and ethically. I wrote on this topic here Dec. 10, 1996. If businesses aren’t responsible, (1) all businesses suffer, and (2) government inevitably feels the need to make them be responsible.21

Think regionally. The silly bickering between the Fox Cities and Green Bay over their proposed arenas spotlights the silly geographic rivalries that interfere with doing business — the Fox Cities vs. Oshkosh, Manitowoc vs. Sheboygan, Appleton vs. Grand Chute, northern Door County vs. southern Door County, Algoma vs. Kewaunee, and so on. 22 Rivalries are good in sports, but in few other places.

Rooting for the Green Bay Packers is a civic duty. The Packers unquestionably are the most recognizable feature of both Green Bay and Northeast Wisconsin. The impact of the Packers’ Super Bowl win cannot be completely calculated23, but in addition, Green Bay and Northeast Wisconsin would attract much less national attention than they do now. You may not like that, but that’s the way it is. When the Packers do well, all of us do well.


* Or at least “Longest.”

1 Now Journal Community Publishing Group.

2 I was at Marketplace for 7½ years the first time, and I’ve been here officially one month, so 7½ years plus one month equals …

3 Technically, there was an editor before Jon, but the creator of Marketplace asked him to leave before the first issue because though he “could type like the wind,” he also “had the creativity of warm milk.”

4 The cover story of my first Marketplace, March 1, 1994.

5 Re Buchanan and Clinton’s wife, now running for president: George Santayana: “Those who cannot remember the past are condemned to repeat it.”

6 The more things change …

7 The Heritage Foundation reports that, since 1945, tax revenues have averaged around 17.9 percent of Gross Domestic Product. Tax receipts jumped to a record 20.9 percent of GDP in 2000, dropped to 16.4 percent of GDP in 2004, and then rose to 18.8 percent of GDP in 2007. The Heritage Foundation estimates that if the Bush tax cuts are allowed to expire, as would be likely under a Barack Obama or Hillary Clinton presidency, would exceed the historical average as soon as 2013 and shoot above the 2000 record in 2025. Regardless of the specific numbers, Hauser’s argument remains correct.

8 The nonprofit counterpart is the 403(b) plan.

9 This paragraph shows how deficit spending and increasing debt is supposed to work. The problem is that the theory has not been supported by the evidence, so far. Publicly held debt as a percentage of Gross Domestic Product — which is the governmental equivalent of a family’s debt-to-income ratio — is, as of this writing, 36.4 percent, below the annual average since 1940 of 45 percent. I’m not a banker, but I’m betting that someone who makes $100,000 a year and has no other debt could probably find a financial institution from which to borrow $36,400. That 36.4 percent figure is less than Japan (194.4 percent!), France (66.6 percent), Germany (65.3 percent), Canada (64 percent) and Great Britain (43.3 percent). There is also the school of thought that our debt isn’t high enough — that as long as borrowing costs are less than the rate of return, you are ahead of the game. (That’s a theory I’d love to try with someone else’s money.) As The Skeptical Optimist puts it, “The federal government will run out of excuses for not balancing its budget — as soon as General Electric and Wal–Mart stop using a mixture of growing debt and growing equity to fund their growth — and as soon as the Smith, Jones, and Rodriquez families (all generations, moving through time) stop accumulating growing debt for houses, car loans, and family businesses even as their total family incomes continue to grow. When everybody else stops borrowing, the federal government will be out of ‘excuses.’”

10 Or, in the case of Wisconsin, fund other spending, as in the case of Gov. James Doyle’s two raids on the transportation fund, along with the $200 million raid from the Injured Patient and Families Compensation Fund (currently in litigation), to fund state government spending.

11 The 2008 Social Security trustees report estimates that the Social Security trust funds will peak (in 2008 dollars) in 2017, then drop through 2041, the estimated year in which payroll tax revenues coming in will equal benefits paid out, whereupon the Social Security Trust Fund will be in perpetual deficit if nothing is changed. That, believe it or not, is the good news — Medicare is projected to go into deficit this year.

12 Hayworth left Congress in 2007. You can guess what happened to his bill.

13 No, he isn’t.

14 This is the correct way to oppose a mine project: In 2003, the Mole Lake Sokaogon Chippewa and the Forest County Potawatomi Tribes purchased the mine site and the company that wanted to develop the mine and decided not to develop the mine.

15 This point bears repeating to all those who have bought the global warming hysteria hook, like and sinker. For instance: The winter of 2007–08 was the coldest winter since 2001, both worldwide and in the U.S.

16 One police department may go away if Grand Chute decides to merge its police department with either the Appleton Police Department or the Outagamie County Sheriff’s Department. The Neenah and Menasha fire departments merged in 2003. Both are good steps, but only first steps.

17 Thankfully, Kelly lost to retired Justice Jon Wilcox. Wilcox’s win preserved the Milwaukee school choice program.

18 Who is now an Oshkosh alderman.

19 Actually past and future — the past was “In defense of our wheels” in the Aug. 20, 1996 Marketplace, and the future was in “Vote for our automobiles” in the March 3, 1998 Marketplace, and “Thoughts while on the commute” in the July 20, 1999 Marketplace. One of those columns resulted in a letter signed by the heads of three area transit bodies; to put it mildly, they weren’t fans of my work.

20 To say that Hilliard, who left AMS in 1996, was a character is like saying that Wisconsin winters are cold.

21 This was written, of course, before the ethics scandals involving Enron, WorldCom and numerous others in the early 2000s. One of the results of those scandals was the Sarbanes–Oxley Act, which regulates all public companies’ boards, management and auditors. Ironically, Enron used to have a reputation as having one of the nation’s most stringent codes of ethics. Less surprisingly, Sarbanes–Oxley has had the unintended consequences of making predicting corporate earnings more difficult, promoting public companies to go private, and shifting IPO investment from the U.S. to other countries.

22 The New North is a hugely positive step in the realization that working together is imperative for economic growth. The New North was launched in 2005, 16 years after the creation of Marketplace Magazine, whose reason for existence was to promote Northeast Wisconsin — not just the Fox Cities or Green Bay or the Lakeshore — as one market.

23 According to a Green Bay Press–Gazette story earlier this year, Green Package games bring about $4.4 million into the area’s economy, and Gold Package games bring in about $4.9 million. Add the estimate of $60 million impact from training camp, and you get an estimated economic impact, just from preseason and regular-season games and training camp, approaching $106 million.

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