Unleashing Capitalism Presentation

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

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Presentation by Dr. Russ Sobel of West Virginia University

Transcript of Unleashing Capitalism Presentation

Page 1: Unleashing Capitalism Presentation

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

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What Explains Prosperity?What Explains Prosperity?

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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.

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Rankings of Reliance on CapitalismRankings of Reliance on Capitalism

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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

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North Korea vs. South KoreaNorth Korea vs. South Korea

Per Capita Income

= $1,800

Per Capita Income

= $24,200

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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

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Figure 1.1: Average Income by State, 2005

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WV’s PCPI: Rank 48th – 75% of U.S. AverageWV’s PCPI: Rank 48th – 75% of U.S. Average

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1934

1920193019401950196019701980199020002010

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West Virginia's Rank Among States

We Are Falling Behind Other StatesWe Are Falling Behind Other States

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1965 PCPI Ranks: WV=42, GA=41, NC=45

Figure 1.3: State Growth Comparisons

$13,361 $13,900 $13,194

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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

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Figure 1.2: Which Future for West Virginia?

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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

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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

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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

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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

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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

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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

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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

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Barriers to EntrepreneurshipBarriers to Entrepreneurship

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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

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Growth of WV State Govt.Growth of WV State Govt.

1860 1880 1900 1920 1940 1960 1980 2000$0

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West Virginia Real Per Capita State Spending

1921 B&O Tax Adopted – Converted to Bus Franchise Tax 1987

1933 Consumer Sales Tax Adopted

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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)

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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

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Thank You / Q&A

Contact Information:

Russell S. Sobel, Ph.D.Coffman Distinguished Chair

Dept. of Economics, WVU

[email protected]

(304) 293-7864