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It’s Economic Liberty, Stupid

Thirty years ago, deep thinkers such as Harvard’s John Kenneth Galbraith enthralled the wine and brie set with assertions that …

Thirty years ago, deep thinkers such as Harvard’s John Kenneth Galbraith enthralled the wine and brie set with assertions that big government was desperately needed to check the power of the modern industrial corporation, which had grown too powerful and was subverting market forces. Galbraith also wrote in 1984 that the average person living in the Soviet Union was, on the whole, better off economically than his or her counterpart in the U.S. To paraphrase George Orwell, some ideas are so preposterous only an intellectual would believe them.

This issue’s cover story and roundtable highlight a reality quite different from what the heavy breathers on the Charles River predicted. The once all-powerful auto industry is but a shadow of the terrible figure Galbraith depicted. GM, which once commanded two-thirds of the U.S. market, now has barely a third. International competition has seen to that. And as our cover story on Ford’s Alex Trotman reveals, the pressure from international competitors is about to inflict more pain on producers everywhere as more capacity from Korea and Brazil comes on line. From Bangor, ME, to Bangkok, it’s the consumer, not the producer, who has the whip hand. So much for “the new industrial corporation.” Ford Motor Co., once run by bright young technocrats not unlike Galbraith himself, learned this the hard way, when it had a near-death experience in the early 1980s because it hadn’t adapted to Japanese marketing and manufacturing efficiency.

Longtime auto analyst Maryann Keller, managing director of Furman Selz, reckons the current leaders of the Big Three are very different from their predecessors, in part because they understand that they compete in a world market. One wonders whether our political leaders likewise understand how dramatically the world has changed. Several years ago, the Fraser Institute of Vancouver studied how economies thrive. It drew on institutes in 11 countries and 45 economists around the world, including Gary Becker and Milton Friedman. Using similar measures, the Heritage Foundation studied 142 countries. Both studies found a strong correlation between growth and development and economic freedom. The Heritage Foundation’s Index of Economic Freedom ranked the economies of Hong Kong, Singapore, Bahrain, New Zealand, Switzerland, the Netherlands, and the U.S. as the most free. (Cuba, Iraq, Laos, and North Korea received the lowest grades.) Why, despite a stable inflation rate, relatively little protectionism, and low levels of wage and price control, is the U.S. in seventh place? According to both groups, the reason is taxes and, to a lesser extent, their regulatory burden on the private sector. The U.S. has a top income tax rate of 39.6 percent that, unlike Japan‘s, hits a proportionately greater number of its citizens. The U.S. has a host of state and local taxes, sales and property taxes, not to mention numerous regulatory burdens that serve as hidden taxes on commercial activity. As one U.K. manager in our roundtable sidebar remarks, one would think that “the government wants to run our business for us.”

The Congressional Budget Office estimates U.S. economic growth for the next 10 years will average less than 2.1 percent annually, well below the post World War II average of 3.2 percent. However, the economy’s substandard performance is hardly a given. While it shouldn’t be overstated, on balance, when tax rates are reduced, the economy prospers. The U.S. has witnessed three periods-the 1920s, the 1960s, and the 1980s-in which rate reductions spurred dramatic real growth without pushing up the deficit. Conversely, the Johnson surtax of 1968 and rate increases imposed by Bush and Clinton in the 1990s are associated with stagflation of the 1970s and today’s slow-growing economy.

Peter Drucker warns that “few politicians or journalists look beyond the boundaries of their own country when a new measure is discussed….This will no longer do.” One might add to this the importance of economic liberty and property rights, which allowed the advanced countries of the West, including the U.S., to become advanced in the first place.

About J.P. Donlon

J.P. Donlon
J.P. Donlon is Editor Emeritus of Chief Executive magazine.