TCS Daily


Presidents, Politics, and Creating Wealth

By Bartley J. Madden - November 16, 2007 12:00 AM

Most people intuitively understand that wealth is created by private businesses competing for customers — not by the government. Could a presidential candidate win in 2008 by demonstrating a genuine commitment to competition and consumer choice?

That candidate could explain how economic progress is the result of firms responding to or creating new customer needs by combining resources and talent in innovative ways. The companies that do this best have figured out how to adapt to the global competitive environment. The long-term track records of companies provide ample evidence that customers, employees, and shareholders alike have mutual, long-term interests. And those interests are served by continually redirecting resources to their best use.

But the big picture of moving resources to their best use is discarded when politicians offer myriad ways for government to help voters solve problems. A government-knows-best approach ignores the process of, and the benefits from, creating long-term wealth through competition. More wealth enables people to better solve problems and achieve even higher goals for themselves.

Wealth creation, over the long term, is driven by business success in serving customers. Free markets provide a natural discipline to weed out activities that do not add value to customers. In business, the status quo is never a long-term, viable option. Society benefits when skilled business leaders anticipate the future and make early decisions to better utilize resources.

Unfortunately, many people are heavily influenced by some news media that preach a fixed-pie-and-keep-others-from-the-table mentality. Wealth creation is missing from their world views. Somehow they have overlooked the essential facts that business is a creative activity, and that something always must be created before it can be used by its creators, voluntarily exchanged, or sent to Washington to pay taxes.

Politicians play a mega role in the extent to which markets are free or unfree. It is important, therefore, that we vote for candidates who are committed to keeping or making markets free. But are there enough free-market supporters to affect the presidential election?

Maybe. A 2006 CATO Institute study by David Boaz and David Kirby estimates that 15 percent of voters in 2004 favored less government in both our economic and personal lives. Those voters are fiscally conservative and socially liberal; i.e., neither "reliable" Democrats nor "reliable" Republicans. Given the tightness of recent presidential elections, this 15 percent of independent thinkers has the clout to swing elections.

What if a presidential candidate repeatedly and clearly communicates to voters that he or she is absolutely committed to wealth creation principles rooted in competition and consumer choice? What if that candidate calls for an across-the-board elimination of the subsidies and tariffs that reduce consumer wealth, a radical simplification of the tax code, and wholesale repealing of regulations that obstruct the most efficient use of resources?

In addition, consider the big issue of health care. Hillary Clinton describes her health care proposal as full of "choices." But her "choices" are within a massive, new, government-controlled system. In contrast, Rudy Giuliani proposes dramatically less reliance on government and more consumer control over health care.

However, the polls suggest Giuliani has not yet captured the hearts of that 15 percent group of independent thinkers. Surprisingly, the views of the dark horse Republican candidate Ron Paul have been enthusiastically received by the swing voters and he has achieved remarkable fund raising success. Dr. Paul has an evangelical commitment to his interpretation of limited constitutional government. Although his views on government spending, taxes, and regulation appear sound, some of his other positions are difficult to support. The key point is Dr. Paul is effective in communicating his views on fundamental issues that are of great concern to voters in general, and libertarian-leaning voters in particular.

The eccentric Dr. Paul may be unelectable, but he gives straight talk as to why subsidies, such as for ethanol, are detrimental to consumers. Front-running Republican candidates ought to speak as plainly about the differences between pro-wealth creation principles versus wealth redistribution schemes.

The Democratic strategy of Hillary Clinton, Barack Obama, and John Edwards is to assert that the free market represents greed and needs to be policed, and their administration would be the ideal "fairness cop." By explaining the pro-wealth creation agenda, the Republicans could reveal the serious flaws in their arguments.

For example, right now Republicans are silent when the Democrats point out the "obscenely high" paychecks of corporate CEOs. Why not reply that corporate governance does indeed need to be improved? Boards of directors need to be vastly more attuned to representing the long-term interests of shareholders. That includes paying CEOs for performance — something that boards have not done well in the past.

Invariably, critiques of free-market capitalism ignore the competitive process for handling tradeoff decisions. In a well-functioning market system more (or less) skilled CEOs earn higher (or lower) paychecks. With CEO paychecks tied to demonstrated long-term performance, employees, customers, shareholders, and CEOs are all in the same wealth creation boat.

Would the front-running Democrats want American businesses to be run by the lowest-paid CEOs that apply for the job? If not, let's examine the logic of how they propose tradeoff decisions to be made in business. What exactly are the wealth creation principles believed by Clinton, Obama, and Edwards?

Bartley J. Madden lives in Naperville, IL. His monograph, Maximizing Shareholder Value And The Greater Good, can be downloaded from his website www.LearningWhatWorks.com.


Categories:

11 Comments

"Obscenely high"? According to....? And what should government do about it?
"For example, right now Republicans are silent when the Democrats point out the "obscenely high" paychecks of corporate CEOs. Why not reply that corporate governance does indeed need to be improved? Boards of directors need to be vastly more attuned to representing the long-term interests of shareholders. That includes paying CEOs for performance — something that boards have not done well in the past."

What does the author suggest politicians of any stripe do? If the author supports free markets, ANY mention by politicians to control obscene CEO salaries implies there is a government solution. Which is quite contrary to theme of his piece.

Democrats have no interest in wealth creation, only redistribution.
In fact, they want to make it as hard as possible to acquire any wealth. A wealthy educated populace does not need the left. Indeed we have a entire political class devoted to defeat in war and vote buying by attempting to get illegals legitimized and voting, buying votes by class envy and nationalizing medicine, etc.

No, wealth is only reserved for the ruling class under leftist dogma, the masses must suffer equally.

In the case of Hillary Clinton, she will be the most left wing president ever elected if she wins. More socialism, taxes and utter mediocrity.

RE: "Obscenely high"? According to....?
Marjon,
I think what the author is suggesting is that the rules of corporate governance -- which governments (typically a combination of state governments and the federal SEC) set by statute, regulation, and judge-made law -- could be improved by making board members more accountable, not that governments actually intervene in any one corporate board's decisions regarding executive compensation. How, or even whether, that should be done, is of course another question.

Let the market decide
If you think a CEO makes to much money, sell your stock and don't buy their products.

The Author's main assumption in his opening statement is majorly flawed
I refer specifically to the part in **:

"*Most* people intuitively understand that wealth is created by private businesses competing for customers — not by the government."

Then why do the voting patterns of 'most people' prove otherwise?

Amen brother.
Many people think that it is the GOVAGs who are giving them their pay check.

Many (and some here in this forum) also think that it is the GOVAGs who "grant" people Rights.

GOVAG :- Acronym for GOVernment AGent. Any of the millions of people directly employed by Government at any level (local, county, state or federal).

re; flawed
It's because Americans have been brainwashed for so long, by the left-wing MSM, and by the liberal school teachers and professors. So many of them, also writers around here, simply long for govags to run everything. Look at tht Lemuel and Roy, their default setting for every problem is for more statism. They admire authoritarian governments. So people are now afraid of freedom and thus guys like Ron Paul can't get voted in. Spoilt, decadent cream-puffs want nanny states these days.

another basic flaw
Boards are concerned mainly with the SHORTterm shareholder interest rather than the longterm interest.
This because ever more the shareholders demand such. They want maximised shortterm profits, longterm viability be damned.

This goes so far as to sell off profitable parts of the company in order to generate a cash surge which is then paid out as dividends to shareholders, temporarilly increasing share prices so investment banks can sell at a profit (reaping twice).
If the company later collapses the people who profited from that are gone, after having awarded the board members who were in office at the time of their presence those high salaries and bonusses for their effort.

In other words in the current (deeply sick) investment climate longterm interests of shareholders are largely irrelevant as most influential shareholders don't intent to be longterm shareholders at all but want to reap shortterm profits before moving on to their next victim.
Mostly these are the hedgefunds and private equity funds. Very powerful groups with extremely high budgets who use this operating stratey to gain for their own owners/members the highest possible profit for the least possible risk (and they view longterm investments logically as risky because of their own strategies).

When and if this system collapses it may well have left entire continents (read North America and Europe) in economic ruin.

rational thought.
Because most people don't think rationally, and thus don't listen to reason and intuition.
Most also don't know enough to be able to foresee the consequences of Big Government on the economy, they only see the promises of more money for themselves in the short term and see that as good.
That that money comes from taxes they themselves will be paying never enters their mind, they're lulled to sleep by statements about "redistribution of wealth from the rich to the poor", forgetting that the definition of "rich" the left uses includes everyone with an income higher than social security and their definition of "poor" includes only themselves (the Party cadre).

Essay Premise is not logical
Say, for example, the SS Administration was permitted to invest in the stock market as has been proposed. SAy they bought a controlling interest in any profitable public company. If the SS Administration then gave their proxy to the company's board and didn't try to manage the company then the govt would be, in effect, creating wealth.

The major error of Libertarians is a refusal to understand that the primary difference between govt enterprise and private enterprise is efficiency. Govts, like mutual insurance companies and credit unions, tend to be less efficient and generate higher expenses than stock companies.

The primary difference between govt enterprise and private enterprise is NOT efficiency but FORCE
That is what the vast majority of people are ignorant of.

TCS Daily Archives