Prosperity is not a birthright…

The Michael Crichton thriller Rising Sun was published to much fanfare in 1992. Ostensibly a murder mystery, the book was seen by many as a thinly veiled tale of alarm at the Japanese taking over the planet – economically. The book came after a decade of headlines chronicling the rise of the Japanese juggernaut. In 1987 Sony bought CBS Records and in 1989 Columbia Pictures. 1989 also saw Mitsubishi buy Rockefeller Center and in 1990 the Japanese bought the venerated Pebble Beach complex on the California coast. Not only were Americans reading headlines about Japan buying up the country but increasingly they were driving Japanese cars, entertaining themselves with Japanese electronics and staying in Japanese owned hotels if they were practically anywhere in the state of Hawaii. Three and a half decades after emerging like a phoenix out of the rubble of WWII, Japan was poised to take over the world.

A funny thing happened on the way to Japan’s economic coronation however… the country crashed into a brick wall. In 1991 Japan saw the beginning of a real estate driven financial collapse that saw the Nikki drop from a an all time high of 39,000 in 1989 to below 8,000 in 2008. Along the way the economic juggernaut cratered. Between 1980 & 1990 Japanese GDP grew at an average annual rate of 2.4%. From 1991 to 2009 it grew at an anemic average rate of .9% per year. That may not sound like much of a difference, but step back and the difference is stark. During the decade of the 1980’s the Japanese economy grew 24%. Over the two decades since it has grown by a mere 18%.

Fundamentally the Japanese took their prosperity for granted. The government sought to coddle small businesses by limiting competition, both domestic and foreign. They failed to force banks to acknowledge and dispose of their bad loans. Low and negative interest rates gave investors around the world little reason to look to Japan. Most importantly government spending as a share of GDP increased as did the taxes and debt necessary to support such expenditures. Today government expenditures exceed 41% vs. 32% in 1980 and debt has soared to 200% of GDP from 46% in 1980. At the end of the day the Japanese took their eyes off of what it takes to maintain the prosperity they had worked so hard to build.

The coup de grace proclaiming Japan’s economic fall came last week when China “officially” became the second largest economy in the world. (Measured on a Per Capita Income basis however, the Japanese are still far richer than the Chinese.) China is now seen by many the way the Japanese were in the 80’s and early 90’s. Much of the merchandise on our shelves bears a Made in China label, China is acquiring companies and natural resources around the world and the government is the single largest holder of US Treasury Bonds by far. Everything seems to be going in China’s direction.

This column however is not really about the fall of Japan or whether China’s one billion people will take over the world. The tale of Japan is illustrative, not because the Japanese turned out to be paper economic tigers or that free markets eventually fail. No, the Japanese tale is important because it demonstrates what happens when a nation forgets that prosperity is not guaranteed, it’s not a birthright. It is the Japanese’s national lapse in judgment that is important.

The United States was the driving economic force for virtually the entire 20th century. Between its inventors, innovators and entrepreneurs, it led the way to the greatest advance in the condition of man in human history. If any people had the right to think prosperity was their birthright, it would be the Americans of the 21st century. That would be a mistake however, but far too many Americans are making it.

America sits atop the world’s economic pyramid not because of divine fiat or the luck of the draw. The prosperity that Americans enjoy in 2010 (despite the current economic troubles) is the result of generations of hard work, risk taking and innovation on the part of millions of businessmen and their employees over the last 150 years – on a playing field of economic and personal freedom established by our Constitution. Our prosperity was never set in stone and things could have turned out much differently. Indeed we survived the Great Depression despite the FDR’s drive to control virtually every aspect of American economic life. Don’t forget, it was WWII that pulled America out of the Depression, not the New Deal. In 1940 unemployment still stood at 14%, up from 3.1% in 1929, federal spending as a share of GDP was at 10%, again up from 3% in 1929 and the stock market, which by 1932 had dropped 89% from its 1929 high, did not return to that level until 1954.

As America struggles with record debt and deficits, a moribund economy and its citizens awash in a raging storm of government regulation and tax increases, the passing of the torch from Japan to China should help crystallize the choices in November. There is no guarantee that putting the likes of Marco Rubio, Rand Paul and Sharon Angle in the Senate and Rob Woodall and Allen West in the House will stop President Obama and his stridently progressive agenda. What you can be certain of however is that they, along with most of their conservative and tea party brethren recognize that America’s greatness prosperity has always come from the innovation, entrepreneurship and hard work of her citizens and their willingness to brave the risk / reward paradigm in order to achieve their own version of the American dream. The alternative to fiscal conservatives is more of the Democrat idiocy that prosperity is created by government spending and regulation.

That government spending and regulation along with its companion taxes and debt are a recipe for disaster... So, as we research candidates on our Chinese made iPads and contemplate which lever to pull in November, we might want to remember that 30 years ago those iPads would likely have carried a Made in Japan label, and ponder how prosperity can be lost…

Will Republicans have the stones to put Uncle Sam in the unemployment line?

The federal government is big, unwieldy and incompetent. Is there something about large organizations that by definition make them incapable of operating effectively and efficiently? No. Wal-Mart is the largest private employer in the United States and one of the largest in the world. It employs 1.8 million Americans and another quarter of a million people in countries from China to Argentina to the United Kingdom. Wal-Mart may not be your cup of tea, but they unquestionably do a phenomenal job at what they are in business to do: Sell consumers goods they desire at low prices. One can dislike much about the firm but people are clamoring for its jobs and customers willingly give the company almost half a trillion dollars a year. This sixty five year old, nimble, effective and efficient company demonstrates that a large company does not necessarily have to be a lumbering paragon of failure.

Successful, well run large organizations come in all shapes and sizes as well: publicly traded, privately owned, for profit and not. McDonalds, Publix, Kelly Services, Red Cross, FedEx, Boy Scouts, Cargill. Google. The success of all of these companies destroys the argument that large organizations must be ineffective and poorly run.

One name you won’t find on that list is Uncle Sam. The federal government is the single largest employer in the United States. Not only is Uncle Sam the largest employer in the country, but according to a USA Today analysis published last week, federal employees earn literally double what private sector employees earn. On its face that is absurd. The government doesn’t produce anything. It doesn’t create wealth. Government exists only to the extent that it can take (by threat of force) money from citizens who are subject to its jurisdiction.

The fact that federal employees earn double what private sector employees earn might make some sense if government were somehow providing something of value that it was somehow uniquely qualified to do. It doesn’t. There are few things the government does that could not be done far more efficiently and effectively by a private organization. Imagine if the Post Office was run by FedEx. Better yet, imagine if competition for the mail service were opened up to FedEx, UPS and some unknown entrepreneurs with a brilliant idea we’ve never even heard of. Imagine if Amtrak was scrapped and companies decided to provide passenger rail service based upon where passengers wanted to go and what they were willing to pay. In both of these cases and many more the services that the government is providing could be done by companies seeking to make a profit.

The profit motive is a wonderfully clarifying tool. It focuses one’s attention when deciding where to allocate scarce resources. It is of course not the only motive for which people and organizations do things, but unlike charity, support of education, helping the homeless and many other virtuous pursuits, profit generally has a measure of clarity that is unambiguous and devoid of subjective interpretation.

One typical argument in support of government inefficiency is that government does not exist to make a profit. That is true. No one begrudges the Defense Department for not making a profit and few people would want to the FBI to offer its services to the highest bidder. But most citizens do want a government that is run on a tight budget and that only spends money on what is necessary. As such the government should do only those things it must and leave the rest to the private sector. The beauty of profit is that it allows citizens to do a great deal of good, and do it far more efficiently than government. Profit allowed Andrew Carnegie to build 1,500 libraries around the country and another 1000 around the world. Profit allowed JD Rockefeller to fund Spelman College, the University of Chicago, finance the foundations of modern medicine as well as help renovate Versailles in France. Profit has allowed Bill Gates to revolutionize the global philanthropy universe by bringing business techniques to research and funding. For every one of those profiteers there are millions of Americans who write small checks from their own checking accounts to fund organizations from the Red Cross to the Boy Scouts to the United Way to their local churches and civic organizations. (And there are millions more who donate their time and energy.)

By allowing citizens to keep the profits of their efforts they can do far more to address social issues than any faceless government agency. Does anyone not recognize that the Salvation Army could probably do a better job of fighting homelessness or hunger than Health and Human Services if they had even half of HHS’s budget? Does anyone doubt that the hundreds of Catholic schools across the country or Michigan’s Hillsdale College are far better models for education than anything the US Department of Education has ever come up with or imposed? You might not like their politics but at least your kids could read and add 2 + 2. If the government took less control over citizens lives and left them with more of their own money, they would support their local churches and civic organizations who would in turn address social issues on a local and far more rational level, and probably actually make progress on solving them.

The other typical defense of government inefficiency is that government employees are typically better educated and more qualified than their private sector counterparts, and hence must be paid more. That is simply false. President Obama has degrees from two of the most prestigious universities in the country yet he has shown himself to be an incompetent leader and manager. Anyone who has ever tried to navigate the maze of federal agencies can recognize that education and “qualifications” have a zero correlation with effective government. One would imagine there were lots of MBAs and lawyers on staff at the SEC over the two decades they failed to recognize that Bernie Madoff was a crook, despite numerous phone calls and letters suggesting improprieties. How long would that fraud have taken to discover if the people from whom he swindled $50 billion had had to do their own due diligence on Madoff rather than relying on the intrepid SEC? Somehow one would imagine that the damage would have been only a fraction of the final bill.

It’s bad enough when citizens see that the taxes they pay are being redistributed to those who are not sharing their tax burdens or are going to prop up banks and car companies that should have been allowed to fail, but when they see that federal employees earn twice what they do – with rock solid job security – in a government that fails at most things it pursues, they begin to question the legitimacy of government at all.

The next 30 months are going to provide Republicans with a once in a generation opportunity. When they return in January and control Congress they can either return to the big government game that they played for much of the previous two decades or they can decide to become real conservatives and return the country back to the people. Start from scratch and require every department to justify its existence. Do away with Executive Order 10988 which allowed unionization of federal workers. Put Americans back in control over every segment of their lives that is possible and that goes from Social Security to support of the poor to when they want to pay taxes (via the FairTax).

If Republicans can’t earn their conservative bona fides in this kind of an environment, when the table has been so perfectly set for them, then they deserve to be tossed on the dustbin of history as the socialist horde overruns the country and systematically destroys everything that was once great. Will they be up to the challenge? Let's hope so.