Sense and Nonsense

Why it was that some countries and some parts of countries were more successful economically than others.

Many years ago, I began studying economics. I wanted to know why it was that some countries and some parts of countries were more successful economically than others.

Before my study was finished, I had spent more than 4,000 hours and assembled a vast library of books on the subject of economics. I attended conferences on business economics and national economics, and eventually got an MBA degree in which I had to study both microeconomics and macroeconomics. I finally learned a little bit about the subject.

The bottom line is simple: incentives!

Khrushchev once said, “Call them what you want, it is incentives that moves people to action.”

In every country, and every part of every country, wherever you create incentives for saving, investment and productive business activity, you have prosperity, growth, job opportunities and hope for the future.

Wherever you create dis-incentives, in the form of higher taxes, regulations, government control, corruption, favoritism and political trade-offs, you decrease prosperity. In the states that have the highest taxes and regulations on business, you have the highest rates of unemployment and the lowest rates of income increase.

In the policy silly season that we are experiencing right now, you have two major schools of thought. One school of though says that the key to prosperity is to punish businesses through taxes and regulations as much as possible.

For example, oil companies invest tens of billions of dollars in drilling oil fields, building pipelines, leasing tanker ships, building refineries in the US, building pipelines throughout the US to get gasoline to various places, and then delivering the gasoline to your local station. For this, they charge less than a bottle of water that the driver purchases at the convenience store per gallon of gasoline. Oil companies earn an average of 7% on gross sales. Now, congress wants to pass an 18 billion dollar tax on all companies to punish them for their activities.

In economics today, you have the “Something for something party” vs. the “Something for nothing party.” One party offers to give endless amounts of free money to voters if they will support them in November. The other party says that the only way that you can become prosperous is by producing something of value and selling it at a profit.

The great tragedy in politics is that most politicians have never worked in a private business, never started or built a private business, and never made a payroll. They know nothing about how business functions. This is why the average politician in Washington, or in the States, is convinced that businesses earn an average of 50% profit on sales. They are living in a cloud coo-coo world completely divorced from reality.

The fact is that businesses create all wealth. Businesses create all employment. Businesses pay all taxes. When governments place a tax on businesses, the businesses can do several things. They can pay the tax, and pass the costs on to their customers. They can pay the tax and reduce the wages, benefits and incentives for their employees by a similar amount. Or they can move away to a place where taxes are lower. They can even shut down, as many large businesses have been forced to do. But businesses are merely tax collectors for the welfare state.

Coming back to the subject of incentives, there is only one number that counts in our economy: The rate of new business formation. Businesses collapse, merge, or shut down at a rate of 6% to 7% per year. Therefore, there must be new businesses being created at a rate of 7% to 8% per year or more, for the economy to remain stable. This is an economic number that has never changed.

Wherever state or country creates a large number of incentives for new businesses to start up, new jobs are created, new wealth is created, prosperity and opportunity are made available to more people, and the country grows.

When you look at the political policy and statements made by people running for office, simply ask this question, “If these policies are enacted, will this increase the incentives to start new businesses. Will it increase the incentives for savings, investments and the risks necessary to create economic opportunity?”

By the way, whenever there is an election, the out party always claims that the economy is in terrible shape. Most American elections are determined by the state of the economy at the time of the election. If you want to get elected, offering change of some kind, you must declare loudly that the situation is terrible.

If your friends in the newspapers take up the cry, they will also say, day and night, that the economy is in terrible shape. We need new leaders. Vote for the other guy.

Don’t be taken in. in the final analysis, government cannot create jobs. Government cannot create prosperity. Government can only redistribute wealth by taxing the people who are producing it and giving it to the people who are not producing it.

When governments redistribute wealth, they punish the successful and the productive, and they reward the unsuccessful and the unproductive. They reverse the system of incentives in a very negative way. All that a government can do is make it more attractive or less attractive for new business start ups. That’s all you need to know.

I’ll talk to you again soon.

Brian Tracy

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