The Need for Democratic Capitalism and What I Learned from Phil Robertson

by Kevin D. Freeman on June 24, 2019

Last week I had the opportunity to visit with Phil Robertson at his West Monroe home. Phil, as you likely know, is the multimillionaire duck call entrepreneur who gained international fame with the hit TV show, Duck Dynasty. He now is a host on BlazeTV, the same network that houses Economic War Room with Kevin Freeman. If you are a subscriber to BlazeTV, you’ll get to see the full interview. If not, go to EconomicWarRoom.com where you can get a FREE TRIAL to see all the BlazeTV shows, including mine and Phil’s. Phil and I had a wonderful conversation about our mutual Christian faith, the Bible, and politics. We also spoke about economics and which system works best. Phil is living proof that you can start with nothing and build something great. I’ll share my thoughts on Democratic Capitalism and wrap with Phil’s success secrets–four simple bullet points that really sum everything up rather nicely.

First, there has been a frightening massive media and political promotion of so-called “Democratic Socialism.” This modern movement ignores the reality of history and attempts to promote “fairness” while playing up class warfare. The stated goal is to provide “free college,” “Medicare for all,” and to generally share the wealth. It promotes a “green new deal” that would certainly bankrupt our nation. The promises sound good and fair, but the reality would be disaster. And, it can get ugly where people want to see others hurt just to make things “fair.” This can degenerate quickly as it did in the French Revolution (and the Bolshevik revolution, the Nazi takeover, and countless other socialist efforts).

The one area where the democratic socialists get it right is that the wealth disparity has worsened, and present trends are unsustainable. We agree on that problem but absolutely disagree on the solution. Socialism does not solve the problems of unequal prosperity; it just makes it possible to share poverty equitably.

Noted money manager Ray Dalio provided a decent summary of the current dilemma in his article titled, Why and How Capitalism Needs to Be Reformed:

I think that most capitalists don’t know how to divide the economic pie well and most socialists don’t know how to grow it well, yet we are now at a juncture in which either a) people of different ideological inclinations will work together to skillfully re-engineer the system so that the pie is both divided and grown well or b) we will have great conflict and some form of revolution that will hurt most everyone and will shrink the pie.

Dalio goes on to provide a cogent recap of wealth disparity and then proffers a solution that our friend John Mauldin rips apart in his Thoughts From the Frontline. While I agree with John that Dalio’s solution of “Modern Monetary Theory” (which basically involves ignoring restraint on money creation) has some pretty big flaws (especially when other nations reject your currency), we all agree that the current economic disparity is problematic. But we cannot ignore the reality that free-market capitalism has made tremendous strides in reducing global poverty. The American Enterprise Institute published an important chart proving that point:deirdre

Deirdre N. McCloskey wrote an important piece in The New York Times that makes this very point. Capitalism works very well in lifting people from extreme poverty:

Not all of us are rich yet, of course. A billion or so people on the planet drag along on the equivalent of $3 a day or less. But as recently as 1800, almost everybody did.

The Great Enrichment began in 17th-century Holland. By the 18th century, it had moved to England, Scotland and the American colonies, and now it has spread to much of the rest of the world.

Economists and historians agree on its startling magnitude: By 2010, the average daily income in a wide range of countries, including Japan, the United States, Botswana and Brazil, had soared 1,000 to 3,000 percent over the levels of 1800. People moved from tents and mud huts to split-levels and city condominiums, from waterborne diseases to 80-year life spans, from ignorance to literacy.

What, then, caused this Great Enrichment?

Not exploitation of the poor, not investment, not existing institutions, but a mere idea, which the philosopher and economist Adam Smith called “the liberal plan of equality, liberty and justice.” In a word, it was liberalism, in the free-market European sense. Give masses of ordinary people equality before the law and equality of social dignity, and leave them alone, and it turns out that they become extraordinarily creative and energetic. [CONTINUE READING at THE NEW YORK TIMES…]

Here is a chart that Bill Gates has referenced and tweeted:

Image result for decline in extreme poverty chartThis is not just an American phenomenon but in reality, a global one. Poverty began to decline in the late 18th century, just after 1776 when Adam Smith wrote his book on the Wealth of Nations and the American experiment began. It is no coincidence, however, that America has led the world in economic productivity, rising from a fledgling nation to economic powerhouse in a relatively short period of time. For most of the past two and one-half centuries, America has been the leading advocate of free-market capitalism.

But, as Ray Dalio points out that as the American experiment aged, capitalists began to replace productive laborers with machines. They also moved production overseas where labor was cheaper. From Dalio:

1) The pursuit of profit and greater efficiencies has led to the invention of new technologies that replace people, which has made companies run more efficiently, rewarded those who invented these technologies, and hurt those who were replaced by them. This force will accelerate over the next several years, and there is no plan to deal with it well.

2) The pursuit of greater profits and greater company efficiencies has also led companies to produce in other countries and to replace American workers with cost-effective foreign workers, which was good for these companies’ profits and efficiencies but bad for the American workers’ incomes. Of course, this globalization also allowed less expensive and perhaps better-quality foreign goods to come into the US, which has been good for both the foreign sellers and the American buyers of them and bad for the American companies and workers who compete with them. 

Because of these two forces, the share of revenue that has gone to profits has increased relative to the share that has gone to the worker.

Dalio sees this as creating rising inequality. Regarding the first point, he is correct. Innovation has tilted the scales to benefit capital over labor in many ways. But, that has benefitted all in amazing ways. In regard to the second point, yes, American prosperity has blessed nations around the world. Sometimes it is because global free trade benefits all. But sometimes it is due to unfair trade practices, IP theft, and Unrestricted Warfare being waged against American industry, basically siphoning our prosperity.

But the solution to any of these problems is not to redistribute wealth. Rather, the solution is to redistribute opportunity. We don’t need Democratic Socialism. We need Democratic Capitalism.

Wealth redistribution is deeply flawed as a concept because it destroys the incentive to create wealth. The real flaw in the system is that those with wealth tend to horde the opportunity and the societal institutions support that flaw. We have built a massive regulatory structure that inhibits opportunity. The net result is that people are substantially poorer than they otherwise should be. One estimate is that the average family is 75% poorer.

It is no coincidence that the freest economies tend to be the best performing. Freedom begets opportunity and opportunity creates prosperity. This is seen over and over throughout history. The problem is that the wealthy class tend to create a “nanny state” that sounds good but stifles opportunity. Witness Michael Bloomberg and his desire to limit soda sizes for the masses. In addition, the “haves” tend to create regulatory and licensing barriers that block access to those outside their club. This is how crony capitalism works and what I believe is the greatest contributor to the wealth disparity.

Even the so-called “progressive tax system” is rigged to the extent that the wealthy can hire high-end accountants and lawyers to minimize taxation while the rest of America essentially pays retail. Let’s not kid ourselves, though. The wealthy do pay a very large percentage of the overall tax pie. The problem is that too few people pay any real amount other than payroll taxes. The goal should be for average Americans to pay more but only because they are making much, much more.

I find it very offensive when wealthy people get together and demand greater taxation on the wealthy. That’s because they know that even aggressive tax proposals will do little to diminish their position. What will happen instead is that they will feel good about themselves while erecting barriers that keep the rest of us from similar success. Here’s my answer:

HEY WEALTHY PEOPLE: FORGET THE FORCED WEALTH TAX PROPOSAL AND PAY MORE VOLUNTARILY IF YOU THINK IT IS SUCH A GOOD IDEA!

There is nothing that prevents Warren Buffet from giving billions to the U.S. treasury if he wants to do that. He can get all his buddies together and they can pay down the deficit.

A Real Problem and a Real Solution

Rather than redistributing the pie, let’s give everyone a chance to grow the pie including their own piece of it. While improving labor skills is useful, to accomplish a growing pie for everyone will require that we find ways to help individuals become entrepreneurs and investors. Unfortunately, our system is more geared to shoving people into the workforce. For example, we push for everyone to go to college but Bill Gates, Steve Jobs and quite a few others have done pretty well without a college degree. Do we really think that universal free college is the answer? Think about it. If everyone has a college degree what will that be worth? Workers will simply be more highly educated in their competition with one another.

How can we possibly solve wealth inequality when we put so much complexity and so many regulatory barriers in front of people starting a new business? That not only hurts the initial entrepreneur but also destroys the next tier willing to work for him or her who would also reap the benefits of a successful startup. Consider all the early Microsoft millionaires? They weren’t the founder, but they reaped huge rewards. In fact, 2,200 employees (one in five) became millionaires in less than five years (many under age 30). Similar story for Apple and Google. And the same for those who worked in the early days with Henry Ford. Innovation drives wealth. Unfortunately, our nanny-state system inhibits innovation. So does the tax code. And, so would universal free college.

One of the simplest and best illustrations of our nanny-state approach is the radical war on kid’s lemonade stands. We must not want children to learn the principles of free-market capitalism and entrepreneurship. Hiding behind the excuse of public safety and business licenses, we’ve taken away perhaps the best object lesson of free markets. Let’s be honest. There are a lot of regulations that have been put in place to prevent others from becoming competition. A solid example is hair braiding. No chemicals are used. Any 11-year old can do it. Yet, many states overly regulate something this simple as explained in Reason Magazine:

African hair braiding is a natural process of caring for hair that does not require scissors, heat, or chemicals. Yet, despite its substantial differences from cosmetology, 16 states still force African hair braiders to go through onerous, time-consuming cosmetology training programs. Getting a cosmetology license takes between 1,000 and 2,100 hours to complete and costs thousands of dollars.

Though cosmetology courses teach students how to cut and use chemicals on hair, a possible justification for some sort of licensing scheme, these skills are entirely unrelated to African hair braiding. This type of braiding is not even taught in cosmetology schools.

The District of Columbia and 14 states require specific licenses for hair braiders that are separate from cosmetology licenses. These licenses come with mandated training that takes between six hours and 600 hours, depending on the state…

The requirements to braid hair are completely out of line with the risks posed to the public. Among the states that make African hair braiders acquire a cosmetology license, the amount of training required is between three and 19 times greater than the hours necessary to become licensed as an emergency medical technician—a job that deals with life and death situations….Occupational licensing is a common way to keep people out of work. Countless occupations, from handymen to interior designers, face barriers to work that do little to protect public safety. [READ MORE at REASON MAGAZINE…]

Does that make any sense? It does if you are one of the lucky few who have a license and the force of government to restrict your competition. But this is a form of crony capitalism, where business and the government restrict the potential for others to pursue their own happiness. Cronyism is not just limited to our businesses. We also see foreign powers seeking to influence laws and regulations to their benefit and at our expense. Remember, what we see as a marketplace, our enemies see as a battle space.™ So, Russia will lobby to stop our energy development to benefit their own industry. This is economic warfare.

Regulations also hinder aspiring investors. In fact, the cream of investment gains are reserved for the wealthy by law. That is because we don’t allow non-accredited investors to take risky pieces of potentially high-reward opportunities. As the financial reporting regulations for public stocks (those listed on the stock exchanges) have become more onerous, the great wealth engines have shifted to private equity for capital. This means that the early and huge gains are gone before an average investor gets a chance to participate. Prime examples are the so-called unicorns like Uber and Airbnb. These are great ideas and eventually they become public. But the huge gains are often gone by then. The extremely wealthy and their venture capitalists and private equity funds have absorbed the big win before the public offering.

Case in point, Uber

Uber was just a concept ten years ago. It was valued in the $75 – $100 billion range before it went public a couple of months ago. Only insiders and the wealthy had a shot at that meteoric opportunity. Then it went public at $45/share and the share prices promptly dropped. As this is written, the share price is around $43. The point is that early investors put in around $25 billion and now have the vast majority of a $75 billion company. I have no problem with that. Those who take early risks should earn outsized rewards. What I do have a problem with is the idea that those amazing gains should be reserved by law for the elite. Average investors are not allowed to take private equity stakes. They are excluded from venture capital and private equity to a large extent.

What I’m really saying is that we have erected a “safe space” and “nanny state” that reduces risk for Americans but as a result also shuts out opportunity and thus rewards. Free college for all won’t solve the problem and would likely bankrupt our nation, especially if we have open borders. But less regulation combined with opportunity for both entrepreneurs and investors would greatly level the playing field. Supporting emerging businesses among the middle and lower classes would be far better than redistributing wealth. The solution to the inequities of capitalism is not socialism but rather more opportunity for capitalism.

Just think about it for a moment. Imagine foreign policy. Is it better for America to give foreign aid to other nations or would it be better to help those nations develop their economies? So why isn’t the same solution better for less affluent communities?

Fortunately, we are in what I hope are the early innings of a genuine regulatory rollback. The Trump Administration has been slicing and dicing the excessive regulatory buildup that accelerated during the Obama terms. There is a renewed push to help young entrepreneurs learn the ropes.

There is also some potential good news on the investor front. The SEC has floated a proposal that would allow regular investors, working alongside a qualified advisor, to invest in deals previously limited to those deemed “accredited.” This would be huge as it would allow average investors to join with others and invest in emerging companies. Reducing the regulatory red tape would open opportunities for both investors and entrepreneurs.

These are the best approaches to wealth inequality. They are part and parcel with Democratic Capitalism. They make it possible for others to advance. 

When you consider a quadrant with free markets on the right and government control on the left, with capitalism on the upper half and socialism on the bottom half, you get four possible quadrants each representing an economic system. The horizontal axis shows how you earn money, whether you have high degrees of freedom (right side) or lots of regulation (left side). The vertical axis shows who controls the money you earn, whether you get to keep your money (upper half) or it gets redistributed by the state (lower half).

In the lower left, you have state-dominated socialism which is really full-blown communism. In the lower right, you have so-called Democratic Capitalism where you are free to earn, but it is taxed away for sharing. In the upper left, you have crony capitalism where the business and state work together to control what you can earn, but you keep what you are able to get. The best system is Democratic (or Free-Market) Capitalism. Everyone has opportunity and people get rewarded for their hard work. That was the intention of the limited government established under our U.S. Constitution.

The goal is not to eliminate capitalism. It is to help everyone become a capitalist.

One More Thing

The one remaining issue with Democratic Capitalism is that some will seek personal wealth regardless of societal cost. There is some validity to this concern. For example, there are examples where too little regulation allows for people to profit from excessive pollution. There are also examples where investors will seek profits by selling out national security. In other words, there is a point where there is too little regulation. That is no doubt true. We all need basic societal rules to provide for clean water and clean air and basic safety and health provisions. And we certainly need to prevent foreign entanglements that threaten our nation’s security. In addition, we need reasonable taxation to provide basic government services, especially the national defense. So how do we get the balance? Well, we don’t get it by denying opportunity. Neither do we get it by stealing from one group to give to another.

The balance actually comes from a moral compass. The missing ingredient is teaching right from wrong, especially in a Judeo-Christian, Western Civilization sense. The key is to follow the Constitution because it has the balance we need IF we do so in a moral fashion. The Constitution was the founding document for the most successful nation in the history of the earth. But we must not forget the warning of our nation’s second President, John Adams:

File:John Adams, Gilbert Stuart, c1800 1815.jpg

 

“Our Constitution was made only for a moral and religious People. It is wholly inadequate to the government of any other.”

–John Adams, 2nd President of the United States

Religion and morality can serve as a governor to stop the exploitation of society or traitorous behavior. When people truly follow the tenants of the Judeo-Christian faith, the 10 commandments, loving your neighbor, and the Golden Rule, the risks of exploitation are eliminated. In addition, people become very generous which further reduces wealth inequality. People give from cheerful hearts. That is the work of the Holy Spirit.

I was with Phil Robertson of Duck Dynasty fame recently. He shared with me four principles for success. When applied, they pretty much sum up a plan for a nation’s success as well:

  1. Hard work.
  2. Apply free-market capitalism.
  3. Love God.
  4. Be generous.

Come to think of it, those are the very things that made America great in the first place! The first two come from our Constitution. The second two come from knowing God. When they work hand in hand, things can be “Happy, Happy, Happy!”

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