September 5 2012

False Economic Rhetoric Won't Create Jobs

Charlotte Hays

“We can’t afford more top-down economics. What we need are policies that will grow and strengthen the middle class.” — Barack Obama

We’ll be hearing a lot of talk like this in Charlotte for the next two days. It is designed to contrast the middle-class loving Democrats to the Republicans, who only care for millionaires and billionaires and who, in the Democratic version, grab most of the money before it trickles down.  

Steve Conover, who is a veteran of thirty-five years in the corporate world, explains on the American Enterprise Institute’s site how the Democrats' top-down rhetoric gets it precisely backwards:

“Top-down economics” is a hijacked phrase. Objectively, it should be the label assigned to rule-of-czar capitalism steered by government officials. Instead, campaign rhetoric has been assigning it to rule-of-law capitalism driven by consumers and entrepreneurs—supposedly a system steered by the already-rich, in which money gradually trickles down to the middle class.

As vivid as that image may be, it is a false depiction of what really happens in a properly functioning private sector. But once the false image captures the attention of enough voters, it’s a simpler step for political entrepreneurs to sell themselves as the better alternative—simpler, that is, than having to compete against the way a vibrant private sector actually works.

Conover says that an entrepreneur needs three things to succeed (and thereby create jobs): an idea, drive, and funding. After funding is found, the entrepreneur takes a huge risk, and, if he fails, the entrepreneur is the first to go broke. Conversely, given the need to pay back her funders, the entrepreneur is the last to be rewarded if the project succeeds. This, Conover points out, is very different from starting out rich and allowing money to trickle down.

The entrepreneur can obtain start-up funding from two sources: the private sector or the government. Conover writes:

Should the government use higher taxation to forcibly extract additional money from the already-prosperous, then somehow allocate it back into the private sector as the bureaus and agencies see fit? Or would it be more effective to trust private-sector intermediaries—such as private equity firms—to select which specific entrepreneurs should be matched up with capital that the already-prosperous voluntarily make available through those intermediaries? Those who prefer government-allocated funding (“stimulus”) for job creation prefer top-down economics. Conversely, those who prefer privately allocated funding prefer bottom-up economics.

So the irony is that it is actually the Democrats—many of whom believe that the stimulus should have been even bigger—who advocate the top down approach. It means trusting the supposedly superior wisdom of government bureaucrats when it comes to investing money. Energy Secretary and Solyndra fan Steven Chu, who wasted half billion taxpayer dollars with one of these top down schemes--Solyndra--is a prime model of government as investor.

By contrast, the private sector takes risks with private money and uses purchases (or rejection) by consumers to decide what products will continue to be offered. Believe me, if there is money in solar panels (and there probably is) a private entrepreneur is more likely to find it that a government bureaucrat such as Mr. Chu working with somebody else’s money.

These two models—private sector vs. government—are at issue in the presidential race. Mitt Romney argued in Tampa for the private sector, while the Democrats will argue in Charlotte for increased government involvement in the economy. The private sector model is the real bottom-up one:

It trusts the private sector to evolve in the favorable direction of a higher aggregate standard of living, to allocate capital from those who have it to those who need it, to add new jobs that require new, higher-level skills, and to jettison or outsource obsolete jobs that require only yesterday’s lower-level skills. It trusts adequately funded entrepreneurs to continue surprising the world with innovations rivaling those of the past and present—such as the Internet search algorithms of Google, the horizontal drilling technologies of Big Oil, the instant-communication platform of Twitter, the slicker-than-cash payment system of Square, and the low-cost mega supply chain of Wal-Mart. It trusts consumers to sort out winners from losers in a trial-and-error process. Bottom-up economics is consumer-knows-best economics.

Which path to job creation and prosperity do we prefer: A continued emphasis on trusting government with top-down economics, or greater emphasis on trusting consumers and entrepreneurs with trial-and-error bottom-up economics?

President Obama doesn’t understand the dynamism of capitalism—how would he? He regards any bad investment made by Bain Capital as pillaging directed at employees. He has no sense of trial and error, economic risk, or relying on the consumer for information about the value of a product. I’d rather people fail with their own money—and, in the rough and tumble that is capitalism, they create jobs--at no cost to me, unless I am an investor. 

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