Will entrepreneurs be fleeing the U.S.?

In: Education| Incorporation By: Brian Armstrong

23 Feb 2009

It seems lately that everyone is arguing about where to spend the “stimulus” money for the auto industry.

Some think they should stop manufacturing cars and just design them. Some think they should take all the stimulus money and give it venture capitalists. Some think the car companies should fix their PR. And some even think they should recruit Steve Jobs to be the car czar!

Everyone is missing the point: we don’t need to guess!

Some of those ideas have potential, some are really stupid. But it doesn’t matter. We shouldn’t have to pick one. There is already a time tested, guaranteed, method which has worked for hundreds of years which will determine the best way to fix the problem. It’s called the free market.

Individual people can sometimes get it wrong. We bring our personal biases, our own background, etc. If one person (or a small group of people) decides how to spend the money, they COULD get it wrong (and often do).

But if instead of a few people deciding, thousands or millions of individual people decided by “voting with their dollars”, all competing against one another, then we could try those solutions and thousands more simultaneously. The free market would name a winner based on who got the most “votes” (dollars) and came out profitable. The lure of financial gain would motivate these entrepreneurs to compete in this race to find the best solution.

But by having the government decide for us, we’ve nipped that race in the bud and placed our fate in the hands of a few people deciding for us (more on the qualifications of those people at the end).

Imagine if the government had to pick a winner for renewable energy and decide what to invest in? Would it be solar, wind, bio-diesel, nuclear, etc, etc, etc? The truth is that nobody knows what will ultimately end up on top. And if you give a handful of “expert bureaucrats”, especially with all the special interests and lobbing going on in Washington, the right to choose for you, you’re in trouble. Thousands of entrepreneurs trying their own solutions in a true merit based competition to see whose works best is the way America became great.

Some final thoughts…

Want to know more about the team of “experts” who will be deciding how to spend your money to “stimulate” the auto industry? Alexander Muse writes about how not a single one of them has auto-industry experience, and of the 18, only 2 drive American cars. Nice!

I’m reminded of something Milton Friedman would say: You always spend your own money more carefully than you spend someone else’s.

Finally, there a number of world organizations that rank countries by their economic freedoms. Historically, the U.S. has consistently been in the top three. It’s what differentiated America from everywhere else in the world and made our economy great. But in the last 10-20 years or so the U.S. has moved more toward socialism and fallen as low as 8th or 9th in the world. Personally, I find it rather annoying that the average business income tax rate in the U.S. is now around 45%, which means the government owns about 45% of the production of our economy. We are about 45% socialist by that measure.

What is the alternative?

If this keeps up, do you think entrepreneurs will continue to incorporate in the U.S.? For myself, I’m thinking that after Buenos Aires I might try moving to Hong Kong and seeing what it’s like there. As a citizen of the world, I’m more interested in going where I can prosper the most instead of trying to change the U.S. (a futile effort) or waiting for it to come to it’s senses.

Guess what the business tax rate is in Hong Kong? A flat 16%.

Here’s to discovering new ways to break free!
Brian Armstrong

Tags: business tax, economic freedom

21 Responses

Matt Thomas

February 23rd, 2009 at 7:18 pm

The problem here is that we have already voted with our dollars. The big three is suffering so much because they have inferior products that no one wants anymore. Consequently, we voted against these companies and purchased elsewhere.

While normally, companies who are voted against would naturally fall to the wayside, these companies are being kept alive artificially, to continue to produce inferior products that no one will continue to buy.

The point is that this stimulus to the big three is quite anti free market and only adds inefficiency to our economy and industries by keeping these inferior companies alive. While we can continue to vote against them, when will the line be drawn?

The argument that the stimulus is in a large part to protect American jobs is another issue entirely and certainly carries a lot of merit. I am only commenting on the BUSINESS aspect of keeping the big three alive, not the employment aspect.

Brian Armstrong

February 23rd, 2009 at 10:31 pm

That’s a good point Matt…I suppose the whole reason they are in trouble is that consumers have been voting against the big 3 for a long time with their dollars.

I really like that phrase, “voting with your dollars” because it cuts through all the BS. People can talk all they want but the proof is in the pudding…did you get the votes from consumers or didn’t you, end of story.

As for preserving the jobs…it seems very shortsighted to me. Thanks for the comment!

Matt Thomas

February 24th, 2009 at 5:12 pm

It may sound shortsighted, in that preserving inefficient large companies would be for the sake of saving current jobs. However, US leaders need to balance long term decision making with some that are near-term. It may not be ideal, but my hope is that once the economy improves, these inefficient companies can be left to their own devices.

College Town Menus (CTM)

February 25th, 2009 at 11:28 am

I’m assuming you’re not a fan of nationalizing banks either…
…Neither am I.

Brian Armstrong

March 1st, 2009 at 5:20 pm

Correct.

John Bardos

February 24th, 2009 at 2:15 pm

Hi Brian,

I think you will find that the tax rates in the US are still substantially lower than most other developed countries.

I am all for lower taxes but it is also nice to live in a country with clean streets, decent education, quality health care, and a generally good standard of living. Those things cost money.

I love Hong Kong, but I would hate to live there. The pollution would kill me, not to mention the astronomical rents.

I live in Japan, we pay about 40% more more for gas than Americans. Most of the roads here are toll roads. It costs about $50 one way to get to the airport from my house. We also have to pay car taxes of about $400 per year above parking fees and insurance.

The Japanese automobile industry’s success is largely due to the fact that it is highly regulated. It is just too expensive to drive old cars in this country.

If you want a great place to do business, come to Japan. There are still large opportunities here.

Brian Armstrong

March 1st, 2009 at 5:22 pm

Japan doesn’t rank very highly in terms of economic freedoms….as you pointed out, highly regulated, etc. Not sure I’d agree that the Japanese auto industry has been successful because of regulation either. They are an interesting case…

John Bardos

March 2nd, 2009 at 7:19 am

Hi Brian,

Some things in Japan are highly regulated, but it is still a relatively easy country to start up businesses.

I feel regulation has played a huge part in the Japanese automobile industry. Taxes are too high to drive old cars, so everyone buys cars far more often. More car purchases means a stronger automobile industry. In other countries around the world there is virtually no regulation. Hence, all those old cars falling apart everywhere. Drive around any country in Eastern Europe and you are bound to see cars broken down on the side of the road. You will never see that in Japan.

Also, high gasoline taxes encourage demand for smaller and more fuel efficient cars. Japanese companies only make those ridiculously large trucks for the North American market.

In addition, MITI played a huge role in jump starting many industries, including the car industry. I would say that regulation played an integral role here.

If the US had higher fuels taxes, stricter emission standards, demanding vehicle inspections and car taxes, American car companies would be in a much stronger position now. That is all regulation.

Brian Armstrong

March 1st, 2009 at 5:37 pm

Also, OF COURSE “tax rates in the US are still substantially lower than most other developed countries”.

That’s what I said…it fell to #8 or #9 in the world, at its lowest and isn’t even that low now. There are a ton of countries in the world! #9 is still better than most, lol.

My point was that it’s losing ground recently with a general trend toward socialism and might not be the best.

Quint

March 1st, 2009 at 5:49 pm

Come on Brian, don’t be so disingenuous. You said

“I find it rather annoying that the average business income tax rate in the U.S. is now around 45%, which means the government owns about 45% of the production of our economy. We are about 45% socialist by that measure.”

That may have been said in a moment of frustration, and you may have meant to say something else, but we are only responding to the words you used in your article.

Craig Lawton

February 24th, 2009 at 6:43 pm

Simplistic ideology! Equating free markets with democracy (“votes”) is simplistic.

And socialism? Don’t be a drama queen. Government intervention is what it’s called, and it’s always going to be with us, to some degree, because governments wear the blame when things go bad.

As a business blog writer, you should be comfortable with all this. The government has to balance special interests, like yours, against each other.

Brian Armstrong

March 1st, 2009 at 5:24 pm

True it might be premature to call it Socialism…they are really two ends of a spectrum, but we’re certainly moving toward that end of the spectrum.

Also, I’d really rather government didn’t balance special interests (mine or anyone elses). They shouldn’t be balancing anything, that’s how mistakes get made when individual people get involved. The free market does that job on it’s own without government. What’s profitable get’s pursued!

Quint

February 25th, 2009 at 12:44 pm

First off, we don’t have a truly free market. Lobbyists and other special interests have greased the palm of Adam Smith’s invisible hand and it isn’t working the way it should. Artificial barriers to entry exist in many of the markets you mentioned, so there can’t be true competition in those spaces.

Secondly, while you are correct about actual tax rates, to get a true picture, you must look at effective tax rates. Because of all of the exemptions and loopholes in the tax system, the effective tax rate is about 25%. Speaking globally, that isn’t too bad. I think you also have to look at what you are getting for the money. Of course, that is subjective, so you have to decide that for yourself.

Finally, I would say good luck Global Citizen. Argentina saw a 20% inflation rate last year, which would wipe out most of your savings on taxes. I know very little about Hong Kong, so I can’t comment intelligently, but a quick Google search hints at issues with pollution and corruption.

Aside from business issues, what about quality of life? The top 10 cities in quality of life rankings are in North America and Northern Europe. We have decent schools, an excellent highway system, relative security and more freedom than most of the rest of the world. It seems that the socialist policies you abhor may not be quite as evil as you make them out to be.

Brian Armstrong

March 1st, 2009 at 5:32 pm

I never claimed Hong Kong was a truly free market. I also never claimed Argentina was economically free.

Happy to debate the issues, but lets not misrepresent what I said.

Also, the public school school system in the U.S. is a disaster. It’s our private universities which are quite good. Not sure where you are going with that…

Quint

March 1st, 2009 at 5:57 pm

I never said that you claimed Hong Kong to be a truly free market. What I said was that the US is not truly free market. To expand on my comment, since corporate interests drive much of the legislative agenda, something needs to be done to balance that. I don’t know if the current actions taken by gov’t are the best answer, but we must do something differently to get out of the current mess and ensure equality of business opportunity.

I also did not say that the US had stellar schools. I did say that, on average, N. Europe and North America have decent schools. Let’s not represent what I said ;) It goes to the quality of life issue, obviously. Would you exchange your quality of life for more of what you consider economic freedom?

Brian Armstrong

March 1st, 2009 at 10:23 pm

Oh I thought you were talking about Hong Kong…obviously the US isn’t a 100% free market, wasn’t that the whole point of the post??

Your saying lobbyists and corporate interests are problems – I agree with you – but these are problems of big government, not free markets. So I don’t get your point…are you saying we need to have more economic freedom and get rid of them? Then why the comment about socialism?

The freest countries in the world have the highest quality of life, like US and Northern Europe and all those you mentioned. Those aren’t socialist countries. So it’s def not an issue of trading one for the other.

Quint

March 2nd, 2009 at 5:14 am

Your saying lobbyists and corporate interests are problems – I agree with you – but these are problems of big government, not free markets. So I don’t get your point…are you saying we need to have more economic freedom and get rid of them? Then why the comment about socialism?

The problem, as I see it, is effectively separating government from business. Unless you advocate lessaiz faire capitalism, which would be disastrous, there will be an intersection of government and business. This intersection is where the corruption occurs.

The comments were not about socialism, but socialist policies. Things like progressive taxation, publicly funded education, welfare and health care contribute to the quality of life that we enjoy. Of course the US and Nothern Europe are not socialist. But the countries that have the highest quality of life (N. Europe consistently bests the US) have more socialist policies, generally speaking.

Chiko

March 2nd, 2009 at 9:56 am

Everything you’ve said makes complete sense, but I don’t think entrepreneurs will move out of the US. The US, even though not ranked number one in economic freedom, it still is number one. Why? Because the US has a lot more to it’s value than just economic freedom ranking. Yes, the US has been shifting a little more to the “left” lately but that doesn’t mean that is where it’s going to stay that way.

Brian Armstrong

March 5th, 2009 at 2:13 pm

Thats a good point…it could still be the best overall.

fathersezs

March 3rd, 2009 at 10:19 am

And I am from Malaysia, which does not even feature in the top 40 list. hmmmmmm. Enuff said.

Cheer

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Will entrepreneurs be fleeing the U.S.?

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