WHAT'S BEEN THE SECRET OF AMERICA'S ECONOMIC SUCCESS?

What are the big, basic things that make economies grow?

ECONOMISTS AND POLITICIANS argue about degree and detail—and they surely do—but generally speaking:

• Encouraging competition

• Keeping taxes low, and

• A tight monetary policy

are the three drivers of economic growth.

HERE'S HOW THOSE POLICIES worked for America these past 25 years.

Encouraging competition.

When companies fiercely compete with one another, the result can be lower prices and more innovative products and services. Competition forces companies to constantly innovate—whether through new technology or business models or management processes—to keep ahead of rivals. And key to competition is keeping government regulation as light as possible while also keeping products safe and preventing harmful monopolies.

Starting in the 70s, many American industries were deregulated, including airlines, trucking, railroads, banking, electricity, and communications. This broke down concentrations of market power and unleashed innovation.

Deregulation and increased competition through global trade in many ways have created a more vibrant economy. (London, Paul. The Competition Solution. 2005.)

Established financial institutions such as big New York banks, the New York Stock Exchange, and insurance companies had to compete with junk bond financing, the Nasdaq stock market, and bigger regional banks. Southwest led the challenge to United and American Airlines. And, of course, Wal-Mart challenged locally powerful department and grocery stores.

Deregulation creates flexibility and flexibility clears the way for innovation.

Keeping taxes low.

While the Reagan tax cuts of the early 80s—dropping the top rate from 70 percent to 28 percent and indexing tax brackets for inflation—get much of the attention by economic historians, there was also the capital gains tax cut of 1978 that Jimmy Carter signed reluctantly and the 1997 capital gains tax cut signed by Bill Clinton.

Lowering tax rates does the opposite of what high taxes do, namely, discourage job formation, discourage savings and investment, and encourage tax avoidance and evasion.

As Clinton's Council of Economic Advisors stated in 1994, "It is undeniable that the sharp reduction in taxes in the 80s was a strong impetus to growth."

Tax increases appear to cause a very large, sustained, and highly significant negative impact on economic output. Tax cuts, on the other hand, cause very large and persistent positive effects on economic output. (Romer, David and Christina. White Paper. Univ. of California - Berkeley. 2007.)

All things being equal, lower taxes stimulate economic growth while higher taxes depress it.

A tight monetary policy.

Let's start with the opposite, a loose monetary policy. A loose monetary policy flirts with the prospect of inflation and the dangers it brings. Inflation is bad because it devalues the currency and causes prices to rise. Rising prices cut purchasing power and distort investment decisions. Individuals and businesses look for inflation shelters instead of investing capital where it can be most efficiently allocated.

Inflation seemed out of control heading into the 1980s, but deregulation and tighter monetary policy under Fed Reserve chairmen Paul Volcker and Alan Greenspan helped inflation fall from double-digit rates to today's two to three percent.

Low inflation brings price stability and the two are seen by many economists as essential for long-term growth.

By preventing inflation, a tight monetary policy avoids inflationary spikes that usually leads to recessions. A recession is the natural consequence of an economy wracked by inflation. It's as if inflation sickened the economy and the medicine is recession.

To repeat, a sound monetary policy keeps inflation in check and avoids the danger of a recession.

SUMMARY

There you have it! The big three secrets to America's economic prosperity for the past 25 years are:

• Deregulation that encouraged competition that fostered innovation that made American industry more productive,

• Low taxes that encouraged beneficial investment decisions back into the economy, and

• A tight monetary policy that kept inflation under control and avoided a recession that would have contracted the economy.

REFERENCE

• BusinessWeek. "What's Been the Secret of America's Economic Success?" Internet. November 2007

VALUES, PROSPERITY, AND THE TALMUD

Book Review



There are only about 13 to 15 million Jews in the world. [(Wikipedia. Jewish Population. http://en.wikipedia.org/wiki/Jewish_population) and (Jewish Virtual Library. Jewish Population of the World. http://www.jewishvirtuallibrary.org/jsource/Judaism/jewpop.html)]

Estimates are difficult to come by of their aggregate wealth but their financial success, as a people, is truly remarkable.

Jews account for less than one quarter of one percent (0.23%) of the world's population. I estimate their aggregate wealth at $500 to $700 billion. The world, on the other hand, has an estimated aggregate wealth of $35 to 37 trillion. The world's population, as of 2006, was estimated at 6.6 billion.

How do the figures relate? While the Jewish people account for only 0.23% of the world's population, they account for 1.25% to 2% of the world's wealth.

I had to extrapolate the estimates of the aggregate wealth of the Jewish people as well as of the world. For the world, my source was Capgemini, a prestigious U.S.-based consulting firm. [Capgemini. World Wealth Report. http://www.us.capgemini.com/worldwealthreport06/default.asp]

My research uncovered a lot of material about American Jews. I will quote only two sources here. I am not anti-Semitic and I wanted to select viewpoints that were as objective as possible. The first source was the report of a college professor's study on the impact of religion on wealth. She reported that:

American Jewish household certainly have a greater median net worth than people of other faiths: $151,000 compared to $40,000. [Keister Lisa. Ohio State Research. Ohio State University. http://researchnews.osu.edu/archive/relgwlth.htm]

The second was an American Jew's own analysis. [Silbiger, Steven. 2000. The Phenomenon of the Jews: Seven Keys to the Enduring Wealth of a People. http://home.comcast.net/~neoeugenics/poj.htm] His article contained a lot of interesting tidbits, two of which I shall repeat here:

1. Forty five percent of the top 40 of the Forbes 400 richest Americans are Jewish.
2. One third of all American millionaires are Jewish.

I am amazed at the magnitude of this disproportionate ratio so when I came across this book entitled “Values, Prosperity, and the Talmud,” I promptly read it. Subtitled “Business Lessons from the Ancient Rabbis,” I read further that:

the Talmud (which means “study”) is a comprehensive manual for living that covers almost every aspect of life.

It emphasizes business matters because commerce, more than any other human activity, tests our moral mettle and reveals our true character, and because business offers us some of the best opportunities to do good deeds such as giving to charity, providing employment, and building prosperity in our communities and the world.

Rather than demonizing wealth and trade, the Talmud teaches us to treat commerce as a wonderful opportunity for improvement, challenging us to think of work and money outside the narrow focus of self-interest.

That sounds more than reasonable. There’s wisdom in that logic. I especially love the clause, “commerce, more than any other human activity, tests our moral mettle and reveals our true character.”

The author, Mr. Larry Kahaner, systematically organized and summarized the lessons he spoke of. Each chapter was devoted to a lesson and was sprinkled with anecdotes and sayings. The most surprising insight I had was the unsurprising nature of the lessons from the Talmud. The lessons emphasize honest conduct and fair dealings. They also emphasize respect and dignity for our fellow men. Upon reflection, the Talmud’s lessons should not have come as a big surprise. A tome this ancient can be expected to contain the fruit of generations of scholars who have tested and debated the merit of each sentence. If that is so, then the Talmud must contain statements of principle. Principles, of course, are self-evident truths. Principles are to human values as water is to the oceans. Principles cannot be distilled any further. Below is each chapter, its theme, and one or more favorite lessons from that chapter. My remarks are italicized.

The spirituality of money

1. The ultimate role of money is to afford individuals and companies the time and resources to learn, grow spiritually, and do good deeds.
2. Profitable companies have an additional responsibility to do good deeds with their money by increasing community prosperity through jobs.
3. Financially successful companies focus on pleasing customers, respecting employees, and producing excellent products and services. Companies that strive solely for profit will fail.

Work as a holy act

1. Work is considered a holy act, and all work has intrinsic dignity, no matter what the job.
2. The main practical purpose of work is to earn money. However, work also builds self-esteem by allowing people to support themselves, their family, and the community. Work is our contribution to those around us.
3. A day of rest during the week is necessary for a person's all-around well-being. It increases productivity as well.
4. Strike a balance between work and leisure. Too much of either is harmful.

Treating workers well pays dividends

1. Wages must be paid promptly.
2. Employers are obligated to preserve and protect the workplace. It also must be a safe place to work.
3. Never humiliate or berate an employee.
4. Employers must direct their employees closely, letting them know precisely what is expected of them.
5. Local customs for wages and working conditions should always prevail.
6. Benevolent managers attract and retain the most productive workers. Leaders set the example for a company’s behavior.

Giving and getting a fair day’s work

1. Employees may not engage in any activity outside their regular work that will impair their at-work performance.
2. Employees must work a full workday.
3. An individual should not seek a new job or engage in interviews unless he is truly interested in changing positions. A person may not take a job from someone else.
4. I think this last one is less relevant today:
5. Work close to home, even if it means taking a lower-paying job.

The bonding of corporate profits and ethics

1. Profiteering on necessary commodities is not permitted.
2. So many disgraced business leaders failed to practice this one: Even honest companies must avoid any possible appearance of impropriety in order to keep their reputations above reproach.
3. As individuals, more of us should practice this one: The use of the corporate veil is not acceptable. All managers are responsible for the behavior of their companies. Every employee is responsible for acting ethically.
4. You can find a lot of these especially in most competitive retail markets: All products must have a money-back guarantee.
5. Adam Smith would be happy to see this one: The right price is determined by the marketplace—consumer and seller. Both sides have the same power to set prices.
6. I think this is less relevant today: The seller must make sure the consumer knows exactly what he or she is buying.
7. And so is this: “Caveat emptor” is not an acceptable credo. Merchants can show their products and services in the most flattering manner, and even emphasize their positive attributes, but they must also call attention to any faults.
8. Buyers, too, have an ethical duty: Buyers may not show an interest in goods unless they intend to make a purchase.

Balancing the environment and profits

1. Causing pollution is morally unacceptable.
2. There is no such thing as local pollution. Locally produced pollution can have an impact on places and people located far away.
3. About efficiency and economy of resources: Do not use more materials than necessary.
4. Manufacturing processes that produce waste products are inefficient and less profitable. Manufacturing processes should mimic nature’s economy.
5. Natural resources may be exploited but not wasted in order to produce profits.
6. About balancing progress with the environment: Environmental health must be balanced with economic growth. Neither is more important than the other.

The rules of partnerships, deals, and debt

1. When major stakeholders like CEOs stand to reap considerable buyout packages, this is frequently ignored—usually to everyone else’s detriment: Despite overwhelmingly positive factors, if two corporate cultures are not compatible, the merger or partnership between them ultimately will fail.
2. The written agreement and honor: Honor all agreements with precisely written contracts.
3. Lending money and being repaid: Money lending must be handled as if both sides were engaged in a business partnership; the loan must be for an activity designed to yield a profit.
4. Lenders should not lend money to those with a low expectation of repayment.
5. Lenders may not harass or embarrass debtors.
6. Honor and repayment of debt: Bankruptcy is not an honorable way out of debt. All loans must be repaid in full.

Competition is for true competitors only

1. Do not compete with established companies unless your products and services are substantially different in price, quality, and selection.
2. A small company can successfully compete with larger companies by finding an under-served niche.
3. Milton Friedman and Adam Smith would be happy to see this one: Robust competition always benefits consumers.

Education is a lifelong process

1. Learning is a lifelong process. People must continue their education throughout their careers.
2. Employee learning should be focused on critical thinking and not education by rote.
3. Group learning is more effective than learning alone, because education involves asking questions and exchanging ideas.
4. What’s one difference between information and knowledge? Students should differentiate between information and knowledge. Information is a commodity and assumes value only after it is filtered and analyzed and becomes knowledge.

Charity means more than giving

1. Charity is everyone’s obligation. Donations kept close to home are the most blessed.
2. Helping an individual or company with a loan, a job, or a partnership is the most noble form of charity.

Reputation

1. We were taught these two growing up: Reputations can only be built cumulatively, through protracted hard work, real deeds, and exemplary actions—not as the result of window dressing or short-term, high-impact efforts.
2. In the final analysis, a good name is the prime factor in business success and the only element that endures long after the people who created it are gone.

Amen.