Unleashing Capitalism

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Unleashing Capitalism

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

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• Over 5,000 copies sold
• Over 200 public presentations
• Presentations to 2 Governors
• Won Sir Antony Fisher Award

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What Explains Prosperity?
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Adam Smiths QuestionWhy Are Some Countries
Rich and Others Poor?

• An Inquiry into the Nature and Causes of the
  Wealth of Nations (1776)

• Policies and the system of economic organization
  (e.g., capitalism) matter more than things such
  as resources, geography, education, etc.

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Rankings of Reliance on Capitalism
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Economic Growth is a Function of Both Inputs
and Institutions
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Route 50
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North Korea vs. South Korea
Per Capita Income 1,800
Per Capita Income 24,200
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We are less free market than Estonia and Latvia
States also Differ in Reliance on Capitalism
West Virginia Ranks 50th in Capitalism
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WVs PCPI Rank 48th 75 of U.S. Average

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We Are Falling Behind Other States
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1965 PCPI Ranks WV42, GA41, NC45
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1965 PCPI Ranks WV42, GA41, NC45 2005 PCPI
Ranks WV48, GA33, NC35 Growth Rates WV1.4,
GA2.0, NC2.2
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What Faster Growth Means for Future Prosperity
Average income in West Virginia will reach
50,000 an entire generation earlier if we can
increase long-run growth by just one percentage
point
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How Can Policy be Reformed to Better Embrace
Capitalism and Promote Long-Run Growth?
Today Ill give a menu of reforms in 5 major
areas
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1. Lower Taxes Regulations on Productive
Activities

• Examples
• Capital Investment
• Business franchise tax
• Personal property tax on
• inventory, machinery
• and equipment
• Labor Force
• - Welfare Reform
• Earned Income Spendable Income

0 6,000 12,000
11,026 11,014 15,286
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2. Discourage Unproductive Uses of Resources

• (e.g., excessive lobbying or lawsuit abuse)
• Examples
• Legal Reform
• Our new book The Rule of Law
• End Partisan Election of Judges
• Venue Requirements
• Avoid targeted taxes, credits, subsidies - they
  encourage lobbying

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3. Rely on Entrepreneurial Discovery, Not
Central Planning, to Guide the State Economy

• An economy undergoes continuous change
• some industries fail, others are born
• Capitalism critically relies on entrepreneurship
  and the profit and loss system to direct this
  process
• This process cannot be centrally planned or
  directed effectively - it must be discovered
  within the marketplace

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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 Smiths (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

• Avoid interfering with the profit/loss mechanism
• Avoid regulating prices or wages
• Privatize or induce choice whenever possible
• Dont impose barriers to entering occupations
  industries

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Barriers to Entrepreneurship
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4. Reduce Government Size, Growth, and
Centralization

• Goal should be to increase the share of our state
  economy controlled through the private sector
• An important first step is to constrain future
  state spending growth

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Growth of WV State Govt.
1921 BO Tax Adopted Converted to Bus Franchise
Tax 1987 1933 Consumer Sales Tax Adopted
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4. Reduce Government Size, Growth, and
Centralization

• Goal should be to increase the share of our state
  economy controlled through the private sector
• An important first step is to constrain future
  state spending growth
• Overall spending can also be reduced and made
  more effective by decentralizing spending to
  local governments (WV is 2nd most centralized
  state)

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5. Increase the Security of Property Rights
Impose Checks on the Regulatory Environment

• Restrict the use of eminent domain for private
  redevelopment (post-Kelo)
• (H.B. 4048 was passed in 2006 but it didnt go
  far enough)
• Regulations should be subject to cost-benefit
  analysis (and include sunset provisions based on
  proof of effectiveness)
• - Ex. Mine Safety, ATV

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Thank You / QA
Contact Information Russell S. Sobel,
Ph.D. Coffman Distinguished Chair Dept. of
Economics, WVU Russell.Sobel_at_mail.wvu.edu (304)
293-7864
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The Rule of Law Reform Summary

• Replace partisan elections of judges with
  nonpartisan elections
• Restrict the power of local governments to use
  Eminent Domain (prohibit private transfers
  redefine public use and blight)
• Eliminate joint and several liability in all
  civil tort claims
• End venue shopping by imposing meaningful venue
  requirements
• Impose statutory limits on punitive damage
  awards, or increase the standard for determining
  when to award punitive damages
• Create intermediate appeals court system and an
  appeal of right
• Revise the standard for deliberate intent in
  workers compensation cases