The Economic Indicator that Matters: Capital
In Praise of "Voodoo Economics"
Over the last 34 years, “the economy, stupid” has become one of the most stupid political slogans in America. Made famous by a bombastic political strategist for the Democratic party, it reinforces the idea that US Presidents should be judged by their economic successes or failures. They should not.
America was founded on the principles of individual rights, political liberty, and equal justice under law. And it was that social and political environment that spawned a wave of prosperity and leisure time that had been unimaginable in human history. The greatest threat to that is rights violating monetary and regulatory action.
GDP vs. Capital
To be clear, nearly all monetary and regulatory action will violate rights, liberty or justice. But this essay will focus on the measurable economic effects of certain monetary and regulatory edicts from the 1970 through 2000 that had penalized or freed Americans and international investors.
Unfortunately, the most widely used measuring stick for economic vitality is Gross Domestic Product (GDP). However, that is a statistic that rewards government intervention and I will ignore it.
And as you will see, it is not relevant. GDP measures spending, but the health of any society, culture or economy should be measured by an entirely different economic phenomenon: the flow of capital to the supply side. Money is not stupid; it will either form in large pools or it will evaporate.
Nixon and Carter Years
The 1970s must be labeled an era that punished capital. The Environmental Protection Agency (EPA) was created in 1970, the Occupational Safety and Health Administration (OSHA) in1971 – and on August 15, 1971, President Nixon announced the end of the gold standard for the American dollar. Naturally, that allowed for monetary devaluation that punished savings. And against the advice of his economic policy team, Nixon announced wage and price controls.
Not as well known, he threw in 10% across the board tariffs on imports, but if Nixon’s more rational advisors were against this, who pushed him? As the Imprimis Newsletter of Hillsdale College revealed, it was certain corporate cronies who naturally propagate in the soil of heavily regulated welfare states:
A very good and forceful move at a critical time, said the chairman and president of Reynolds Metals Company. Excellent, said the president of Dow Chemical U.S.A. Bold, aggressive, decisive, said the chairman of Firestone Tire and Rubber Co.
Fighting back against Nixon’s regulatory onslaught, President Carter became known as the Great Deregulator, but he also added a new Cabinet position – the Department of Energy. And adding fuel to the fire, the Federal Reserve was on a demand destruction rampage with vain attempts at interest rate price fixing.
Stoking the flames were more than a dozen individual income tax brackets with the top rate at 70%. All of which offer artificial complexity, invasions of privacy, property rights violations, and the evaporation of capital.
Regardless, active minds will build and innovate. For the decade of the 1970s, they gifted the world Intel microprocessors, the Apple II desktop computers, the Sony Walkman, email communication, floppy disks, handheld calculators, and the Ethernet.
Why do I say gifted? Because their investors and inventors earned only a tiny fraction of the time and money their products and services earned for us.
The Reagan Revolution
By comparison, the 1980s should be labeled an decade that rewarded capital - and the significance of that cannot be overestimated, as the Bill of Rights Institute reported:
Venture capital was difficult to accumulate in the 1950s and early 1960s because of income-tax rates that reached 91 percent on the highest incomes. The cutting of tax rates by upward of 30 percent in 1964–1965 was central to the accumulation of the myriad capital pools that yielded the great venture firms of the late 1960s, 1970s, and 1980s that spearheaded the technology revolution.
During Reagan’s first term, the number of tax brackets were cut by more than half and the top marginal rate was reduced to 28% from 70%. That was tremendous, and according to the US Department of Energy’s report titled Trends in U.S. Venture Capital Investments Related to Energy, venture capital investments in the energy and industrial sectors tripled to $900 million.
In addition, venture capital (VC) for biotechnology increased eight-fold to $800 million, and total VC formation and deployment grew to $12 billion from almost nothing. By today’s standards, all of that seems miniscule, but don’t forget, America was starting from relatively nothing for venture risk capital in 1980.
Besides the dissolution of the Soviet Union, the unification of Germany, and the greatest economic expansion of the 20th century, the venture capitalists and digital engineers of the Reagan years gave us personal computers, digital camcorders, cellular telephones, gaming consoles, DNA sequencing, and the Internet Protocol.
All of that accelerated the free flow of information and capital into the next century because markets react quickly to the price of capital and prices are information.
The Clinton Contradiction
President Clinton’s eight years in office began in 1993 with a capital punishing agenda but ended with some capital rewarding legislation. At this point, it is worth repeating that Presidents get far too much credit and blame for the economic performance of their years in office. They produce nothing, elegant complex systems are resilient, and their moral and Constitutional duty is to get the hell out of the way.
At the same time, money is not stupid, and capital will react quickly to incentives and punishments that are ignored by the economic and financial press. Today, we forget that the Clinton administration pushed the top individual income tax rate up to almost 40%, the corporate rate to 35%, increased the taxable portion of Social Security income to 85%, and subjected all income to the Medicare tax.
Fortunately, the universal health care monstrosity known as Hillarycare was buried until Obamacare resurrected it fifteen years later. But of importance here is that 90% of the tax revenue increases during Clinton’s first term were coerced from the top 5% of income taxpayers. That negation of economic freedom harms everyone.
On the plus side, Clinton’s second term achieved the Taxpayer Relief Act of 1997 that reduced the capital gain tax rate to 20% from 28%. In turn, venture capital for energy and industrial sector investment increased to $1 billion from $300 million during the Clinton year and biotechnology investments increased to $1.5 billion from $600 million. And most significant, internet related VC commitments went from about $0 to $5 billion in 1995 and reached over $50 billion in 2000.
Voodoo Economics
Notice that the starting points for the Clinton years are well below the ending points from the Reagan administration. In between was the term of President George H. W. (no new taxes) Bush who chastised all of us supply siders out there as practitioners of Voodoo Economics.
Comments like that from career bureaucrats and their government educated economic advisors is precisely why “the economy, stupid” is such stupid advice for political candidates. Comments like this from the Bill of Rights Institute explain the true nature of “voodoo economics.”
Intel’s chief founder, engineer Robert Noyce, secured several government contracts in the space and defense industries for the initial portion of his career in the late 1950s and early 1960s. His ambition, however, was to break free of the necessity of government contracting to develop breathtaking new technological products people would independently find useful on a mass scale.