Tag Archives: Private Sector

Why is America so much more prosperous than other nations?

It occurred to me that young people are being taught in government-run schools that central planning of the economy by the federal government works better than allowing states to decide policy for themselves. Naturally, the students – lacking life experience and at the mercy of the unionized teacher’s grading pen – have no choice except to be indoctrinated. But what are the facts?

The genius of America is that the Founding Fathers allowed the federal government to only have power in certain areas of life. Other areas of policy were delegated to the states. This allows states to try different policies to see what works best, or even just what works best for them. Then the other states have the option to emulate that success, or continue doing what doesn’t work. States that do what works will see more success, with more businesses and people migrating to their states. States that persist in doing what doesn’t work will see business and taxpayers flee. That is the genius of America’s design.

Federalism encourages states to operate according to the “principle of subsidiarity”, which is an economic principle that states that problems are best solved at the lowest level possible (individual -> family -> church – > business -> community -> local government -> state government -> federal government). This is because the people at the lowest level have the most KNOWLEDGE about how to solve the problem.

Case study: right-to-work laws

Let’s look at an example – unions and right to work laws. Starting after world war 2, some states decided to pass right to work laws. These laws allowed workers to decide for themselves whether to join a union or not. Since workers had the choice about whether to join the union, the union had to care about the workers and advocate for them, instead of enriching themselves at the expense of the workers via corruption and thuggery.

Here is how different states adopted right to work laws at different times:

Map of states showing adoption of right-to-work laws
Map of states showing adoption of right-to-work laws

What happened in these states? Well job creating businesses started to move from forced-union-membership states to right-to-work states. Why? Because unions were stopping them from innovating. Companies would figure out new ways to improve productivity, such as using machines and computers. But the unions would step in and insist that the old ways were best. The unions wanted their union members to just be able to do the same job, e.g. – pulling a lever over and over, for the entire 35 years of their career. And the unions wanted their members to be paid like a software engineer or a doctor for pulling a lever over and over. The unions also wanted to make sure that underperforming workers could never be fired, or replaced. And so on. Companies realized that they couldn’t compete in a global market like this, so they got up and left for right-to-work states.

Here’s what happened next:

Rates of employment in forced union states vs right to work states
Rates of employment in forced union states vs right to work states

States with right-to-work laws never said that there couldn’t be unions, only that workers wouldn’t have to join a union to work. And in right-to-work states, not only did workers not join unions, they voted not to unionize at all. This resulted in a massive decline in private sector unions in America:

Decline in private sector union membership
Decline in private sector union membership

As a result of job creating businesses not being hampered by union corruption and thuggery, American businesses quickly outpaced their rivals in forced union membership states in productivity, as measured by GDP. They also outpaced the productivity per worker in other economically illiterate countries. Why? Because allowing companies to innovate meant that workers were using more machinery and computers to do their jobs. They learned new skills. Underperforming workers could be replaced with workers who were willing to grow and adapt. Non-union workers higher productivity allowed them to find other jobs if they were laid off.

Right to work states innovate, creating more skilled workers
Right to work states innovate, creating more skilled workers

The job security of the American worker comes from his improved worker productivity – not from the union. Not only did unemployment go down in right to work states (more jobs!) but salaries and benefits also increases, as companies had to compete with each other for workers. However, companies were ok with paying more for workers, because they would rather pay ONLY the workers who deserved it, rather than pay one rate for all union workers, regardless of performance.

This article from the far-left New York Times explains how slaries and benefits rise when job creators move to right-to-work states: Income Rises When Right-to-Work Laws Are Passed because job creators must offer workers a lot in order to get them to sign. Not just salaries and benefits, but realistic development plans to grow the workers skills, making them even more resistant to layoffs and economic downturns.

Quote:

While some persons may favor right-to-work laws largely on philosophical grounds (people should have the freedom to decide whether they want to belong to a union or not), the major reason I support such laws is that they seem to promote prosperity — specifically, higher incomes. Real personal income in the right-to-work states rose nearly twice as much as in other states from 1970 and 2013.

To be sure, most of that reflected higher population growth in right-to-work states — there was massive in-migration to these states from the states denying workers the right to not join a union. Yet even after correcting for population growth, income per person on average rose somewhat more in the right to work jurisdictions. Capital moves to right-to-work states with a more stable labor environment, and that increases labor demand and, ultimately, income and wages.

Although unions mostly died out in the private sector, the ones that remained actually functioned well as unions – focusing on their workers instead of enriching union bosses. They had to, because if they didn’t, then the workers would just opt out of them. The only places where unions still survive is in the public sector, i.e. – government. This is because government is (by law) a monopoly, where consumers have no choice except to accept the garbage that they are offered. They can’t go anywhere else for a lower price, or a better product, or a better service. Public sector unions are immune to innovation, because they lobby the government to prevent any improvement or accountability.

Here is an example of a public sector union’s effort to “help the customer”:

Political contributions by the American Federation of Teachers union
Political contributions by the American Federation of Teachers union

And here’s what those efforts to “help the customer” produced for the customer:

Education spending has tripled since 1970
Education spending has tripled since 1970

They aren’t really helping the customer, are they? What they do is collect dues, enrich their union leaders, intimidate their opponents with threats and force, and then give money to secular left politicians to prevent their customers from opting out of a system that doesn’t produce higher quality and lower prices for the customer. The secular left politicians pass laws that prevent the customers (parents) from being able to get a better product (education for their children) for a lower price. We should abolish public sector unions in order to get the benefits for the customer that we see in the private sector.

Niall Ferguson argues that government is making it harder to run a business

In the Wall Street Journal.

Excerpt:

Seven years of data suggest that most of the world’s countries are successfully making it easier to do business: The total number of days it takes to carry out the seven procedures has come down, in some cases very substantially. In only around 20 countries has the total duration of dealing with “red tape” gone up. The sixth-worst case is none other than the U.S., where the total number of days has increased by 18% to 433. Other members of the bottom 10, using this metric, are Zimbabwe, Burundi and Yemen (though their absolute numbers are of course much higher).

Why is it getting harder to do business in America? Part of the answer is excessively complex legislation. A prime example is the 848-page Wall Street Reform and Consumer Protection Act of July 2010 (otherwise known as the Dodd-Frank Act), which, among other things, required that regulators create 243 rules, conduct 67 studies and issue 22 periodic reports. Comparable in its complexity is the Patient Protection and Affordable Care Act (906 pages), which is also in the process of spawning thousands of pages of regulation. You don’t have to be opposed to tighter financial regulation or universal health care to recognize that something is wrong with laws so elaborate that almost no one affected has the time or the will to read them.

[…]Each year, the World Economic Forum publishes its Global Competitiveness Index. Since it introduced its current methodology in 2004, the U.S. score has declined by 6%. (In the same period China’s score has improved by 12%.) An important component of the index is provided by 22 different measures of institutional quality, based on the WEF’s Executive Opinion Survey. Typical questions are “How would you characterize corporate governance by investors and boards of directors in your country?” and “In your country, how common is diversion of public funds to companies, individuals, or groups due to corruption?” The startling thing about this exercise is how poorly the U.S. fares.

In only one category out of 22 is the U.S. ranked in the global top 20 (the strength of investor protection). In seven categories it does not even make the top 50. For example, the WEF ranks the U.S. 87th in terms of the costs imposed on business by “organized crime (mafia-oriented racketeering, extortion).” In every single category, Hong Kong does better.

At the same time, the U.S. has seen a marked deterioration in its World Governance Indicators. In terms of “voice and accountability,” “government effectiveness,” “regulatory quality” and especially “control of corruption,” the U.S. scores have all gone down since the WGI project began in the mid-1990s. It would be tempting to say that America is turning Latin, were it not for the fact that a number of Latin American countries have been improving their governance scores over the same period.

Whatever the root causes of the deterioration of American institutions, smart people are starting to notice it. Last year Michael Porter of Harvard Business School published a report based on a large-scale survey of HBS alumni. Among the questions he asked was where the U.S. was “falling behind” relative to other countries. The top three lagging indicators named were: the effectiveness of the political system, the K-12 education system and the complexity of the tax code. Regulation came sixth, efficiency of the legal framework eighth.

Asked to name “the most problematic factors for doing business” in the U.S., respondents to the WEF’s most recent Executive Opinion Survey put “inefficient government bureaucracy” at the top, followed by tax rates and tax regulations.

The troubling thing to me is that the private sector has to make a profit in order to fund government, and I don’t see that the private sector will be able to producing the profits needed to fund our government’s lavish spending. Nothing that I see about the next generation causes me to believe that they understand economics enough to vote to improve the business climate. They seem to be very much anti-business. One wonders where they expect to find jobs.

Why do corporations ship jobs overseas? What causes outsourcing of jobs?

World Corporate Tax Rates
World Corporate Tax Rates

Here is a news story from Yahoo News that explains the problem and the cause of the problem. (H/T Dad)

Excerpt:

Large U.S. companies boosted their offshore earnings by 15 percent last year to a record $1.9 trillion, avoiding hefty tax bills by keeping the profits abroad, according to a new report.

The overseas earnings stockpile has climbed by 70 percent over the past five years, said research firm Audit Analytics. Data in its report covers the Russell 3000 index of the largest U.S. corporations.

U.S.-based multinationals do not have to pay U.S. corporate income tax on foreign earnings as long as the earnings do not enter the United States. Accounting rules also let the companies avoid recognizing a tax expense if management intends to keep the earnings indefinitely reinvested overseas.

“It would probably be nice to have this money in our country being used in our economy, but at the moment we see it growing elsewhere,” said Don Whalen, general counsel and director of research at Audit Analytics.

Conglomerate General Electric Co (GE.N), had the most indefinitely reinvested overseas earnings, at about $108 billion, while drugmaker Pfizer Inc (PFE.N) was next with $73 billion, according to Audit Analytics.

The simple answer is that Americans believe that corporations need to pay high taxes and operate under burdensome regulations. This eats into their profits, making it harder for them to grow and expand. The plain truth is that it is easier for corporations to expand and hire in countries with lower taxes and fewer regulations. Besides, who wants to be wiped out by a nuisance lawsuit just because someone spills coffee on themselves and then refuses to take responsibility? The smart play is to just opt out completely, and that’s what many corporations do – earning higher profits in more business-friendly countries.