Unleashing Capitalism Presentation

Unleashing Capitalism Russell S. Sobel, Ph.D. Professor of Economics James Clark Coffman Distinguished Chair

West Virginia University

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

Growth is a function of “inputs” AND “institutions”

West Virginia needs to get its “Institutions” in better shape

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 Figure 1.1: Average Income by State, 2005 $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0

We Are Falling Behind Other States

West Virginia's Rank Among States Per Capita Personal Income Rank

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

Per Capita Income

$30,000

$31,191

$31,029

$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 Venue Requirements  Joint & Several Liability Reform  End Partisan Election of Judges 

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

Contact Information:

Russell S. Sobel, Ph.D.

Coffman Distinguished Chair Dept. of Economics, WVU [email protected] (304) 293-7864