From an article by VITO J. RACANELLI in the latest issue of Barron’s, I extract the following truths.
“… Western civilization’s rise to global dominance over the past 500 years was due mainly to six killer apps, as he [Niall Ferguson, economic and financial historian] calls them: competition, science, rule of law, modern medicine, consumerism, and the work ethic.” TRUE
“When countries improve rule of law, property rights, and investor protections, and when regulation becomes more transparent and corruption reduced, there are major payoffs. The World Justice Project says the U.S. has been deteriorating for close to 10 years by all these measures, which contrasts with improvements in some emerging markets, like Hong Kong.” TRUE
The rule of law has become more expensive in the U.S. without becoming more efficient. Any business, particularly small to medium-size, that has had encounters with litigation in the past 10 years will know what I’m talking about. The rule of law in the U.S. has become, at some level, dysfunctional. One reason for that is the way Congress works. It is a honey pot for lobbyists. The result is that complex legislation is riddled with ambiguities that—guess what?—only lawyers can resolve. Dodd-Frank is designed to improve regulation, but what it actually does is institute a massive job-creation scheme for lawyers. There isn’t a financial institution in this country that doesn’t now require its compliance department to retain a whole bunch of lawyers to explain to them what this 2,000-plus-page monster means for their business. That concerns me.
If you locate a new plant in the U.S., you encounter this increasingly unfriendly regulatory and tax environment. You don’t know what the taxes are going to be, because Congress is playing a game of chicken about the deficit. It ought to be solvable. However, there are vested interests in the political system that have no interest in solving this problem because they profit from it. It is a classic problem of rent-seeking behavior triumphing over profit-maximizing innovation and entrepreneurship. If you only look at monetary and fiscal policy, it is incredible that the economy isn’t growing faster [since] it has had more stimulus than at any time since World War II.” TRUE
“A parallel is the way that things went wrong in Great Britain in the mid-20th century, when a combination of overseas commitments, excessive public debt, vested interests in the form of organized labor, and incompetent management and a pretty decadent ruling elite made Britain the sick man of Europe. There are some lessons there. Over time, good institutions tend to deteriorate because of the human condition. There needs to be a renewal of American faith in the founding principles. A lot of ordinary Americans, especially businessmen, yearn for this and resent the crony capitalism they see between Washington and Wall Street.” TRUE
“It’s always a good idea to be optimistic about the U.S. Ultimately, political leadership will materialize, because the popular instinct on many of these questions is sound and there are political leaders—[Wisconsin Republican Rep.] Paul Ryan, for example—who have integrity and are prepared to push unpopular measures that will ultimately prove beneficial. It isn’t just the tax code. It’s an incredibly complex accumulation of regulation and legislation, the net effect of which is to make it harder to be an innovator and entrepreneur. Not only is the U.S. doing less well in these terms than Hong Kong or Germany, but it is doing less well than the U.S. used to do.” TRUE
What made the West unusual was that risk takers were not only rewarded but honored, whether in science, exploration, or in trade. Spreading across the Atlantic from Europe is an anti-risk culture that manifests itself in two ways. One is the welfare state, designed to remove risk from your life by guaranteeing you an income from the cradle to the grave. That’s great because it means that nobody is starving in the streets for want of work. But it isn’t great if you create poverty traps and disincentives, so that people in the bottom quintile never work, which is the case in much of Europe.
The other way in which the anti-risk culture manifests itself is with the manic regulatory mentality that tries to prescribe rules for every eventuality, including the tiny, tiny risk that an asteroid will hit this building. Regulations that protect from every eventuality end up being paralyzing because the more things are proscribed, the more the ordinary entrepreneur has to be afraid that if he doesn’t comply, he will get sued.”