The following article was published in the July 2012 Discovery Newsletter.
- The Importance of Economic Freedom
Do you think the government – or anyone else – should be able to arbitrarily take away your home?
Is it okay with you if the value of your savings is cut in half due to the government’s policy of quantitative easing?
Do you mind if someone else runs up a debt for $50,551 in your name, without your permission, then leaves you on the hook to pay for it, with interest?
If you care about issues such as these, then you care about economic freedom.
That $50,551, by the way, is the portion of the federal debt owed by every citizen of the United States.
If you look at total unfunded liabilities (which includes promises made for future payments) the total is a sobering $1.05 million per citizen.
What’s at stake
What the media have called “the worst economic recovery…ever” – especially when it comes to new housing construction – has affected several Koch businesses.
Even so, Koch companies still provide jobs for more than 50,000 employees and full-time contractors, including more than 15,000 union members, and are looking to fill more than 2,400 open positions.
According to an independent study, Koch employees and the additional jobs they support pump more than $10 billion in total compensation into the U.S. economy.
What happens to all those jobs if the government and its allies succeed in destroying or diminishing Koch, not to mention many other companies?
What happens to dozens of communities if major operations are shut down because of excessive (and often highly partisan) regulations?
These are not idle questions. They are real-life issues involving economic freedom that will affect the future of Koch Industries, thousands of other businesses and millions of employees.
As mentioned on page 1, economic freedom requires an environment where individual and property rights are protected by a beneficial and impartial rule of law. Freedom to trade for needs and wants is also essential.
Government also greatly contributes to economic freedom when it ensures sound money and remains relatively small. Ideally, every government should limit itself to those activities that actually contribute to societal well-being, such as the protection of persons and property.
Looking at each of these requirements and then reflecting on what’s happening in the U.S., Europe and around the world leads to a simple conclusion: economic freedom is under attack.
Rule of law
Koch Industries is considering billions of dollars’ worth of capital investments in the U.S. to grow and improve its businesses. Why make those investments if new laws or regulations further punish energy intensive industries?
“We have potential projects at many of our facilities,” said Brad Razook, president of Flint Hills Resources. “These would generate hundreds of millions of dollars in construction jobs, equipment purchases and other services. When completed, they would also result in lower emission rates.
“But government regulation of greenhouse gases creates great uncertainty. Only one refinery GHG permit has been granted during the 19 months since that provision of the Clean Air Act went into effect.”
Nationwide, 92 applications for major GHG projects have been submitted by a wide variety of industries, but only half that many permits have been issued.
Of those 46 permits, 33 are being held up by challenges, many by non-governmental organizations that want to eliminate certain industries and energy sources, such as fossil fuels.
“We see the need for these projects,” Razook said, “but if there are long delays in getting permits, we don’t know whether costs will have escalated or if the need will still be there. It’s frustrating.”
In order to be competitive, Razook said, “it’s not enough to know we can eventually get a permit. The timing should be efficient, without such delays.”
“This kind of excessive regulation guarantees the long-term decline of U.S industry,” Charles Koch said. “It’s no wonder that many businesses aren’t hiring.
“If the government would be less intrusive and not needlessly impede, then people would be able to innovate and create real value using fewer resources.”
Freedom to trade
Economic freedom is rooted in the principle of free and fair trade.
This is why Koch Industries actively opposes quotas, tariffs, subsidies and mandates – and any other laws or regulations that distort the market – even when they benefit Koch businesses.
“If other businesses can produce better products for less, they should be free to do so without government interference,” Charles Koch said.
“The idea that the free market is okay for others, but that my business should have government help – which is the essence of cronyism – continues to be one of the most destructive notions around.
“This behavior not only undermines our economy, but our culture and political systems as well.”
Regardless, the U.S. government has instituted burdensome tariffs and quotas on imports of ethanol and sugar, major subsidies and mandates for solar and wind energy projects, as well as onerous permitting requirements on projects that generate greenhouse gases.
When a government skews the market this way, it ends up costing consumers billions in higher prices for goods and services, as well as higher taxes.
Michael Hofmann, who will retire as Koch Industries’ chief risk officer in October, has spent years analyzing global finances. He is profoundly concerned by what he’s seen in recent years.
“The U.S. Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan have, between them, drastically increased the world’s available money to record levels. This has set the stage for serious inflation and even bigger debts down the road.”
Most elected officials have a strong incentive to spend taxpayer money (even when there isn’t any to spend). The more they succeed in funding popular projects, the more likely they will be re-elected.
To get that money, governments typically rely on four things: direct taxes, indirect taxes, borrowing and monetizing the debt.
Direct taxes, such as an income tax, are obvious. Taxpayers usually know they’re paying them and how much they cost. These taxes tend to steadily increase over time, even if just by “bracket creep” due to inflationary pressures.
Indirect or “hidden” taxes – such as the gasoline tax in the U.S. or Value Added Taxes on production in Europe – are not as obvious. Few people have any idea of what those tax rates are or how much they add up to during the course of a year.
When direct and indirect taxation are no longer sufficient to cover spending, governments can borrow from investors (including other nations) by issuing bonds that are paid back with interest.
But they can also “borrow” from their own central bank, which has the power to create money at the flick of a switch.
According to Hofmann, this is how the U.S. financed about 75 percent of its trillion-dollar-plus deficit last year – by borrowing from another part of government, the Federal Reserve, which essentially created the extra money.
“Many governments encourage this kind of perverse behavior because they are big borrowers,” Hofmann said. “In reality, they are defaulting on their debts, because they are paying back investors with currency that is worth less due to inflation.
“They don’t want to call it defaulting or monetizing the debt. They prefer to call it ‘improving liquidity,’ because that sounds like something positive. They also want us to believe it’s only a temporary measure.”
Preserve the pillars
Rising tax rates and a dramatically higher national debt are just two reasons why the U.S. is steadily falling on the annual index of economic freedom.
But it doesn’t have to be that way.
“If we really want to make the world a better place,” Charles Koch said, “we must constantly work to preserve the pillars of freedom, prosperity and opportunity.”
Koch believes that one of the biggest obstacles to recovering economic freedom is lack of courage.
“When your government is big and powerful and determined to maintain its power, it takes courage to stand up and do what’s right in the face of political pressure, cronyism and even threats.
“If businesspeople don’t have the courage to stand up for what they believe, ultimately they won’t have a business, and neither will anyone else – at least one worth having.
“We always strive to act with integrity, even if it’s politically unpopular. That’s why we continue to fight for economic freedom and insist that all of us at Koch – myself included – abide by our MBM® Guiding Principles.”