What Politicians Don’t Tell Us About the Economy

Politicians don’t explain the nuances in the economy, because there are inherent trade-offs. There are some points that cannot be explained in a 30 second sound bit or a 280 character tweet. Hopefully this will help you uncover the truth, regardless of your party affiliation.

Starting economic conversations with a pre-conceived view about left versus right, or Democrat versus Republican, is like children picking a sports team without understanding the game. They just know the side they support, without really understanding the purpose of the game, its rules, the roles of the players and coaches, and strategies for how to play it well. My children love sports, and they know that to play any game you have to understand the basics.

Purpose of the Economy

The natural starting point is clarifying the purpose of an economy. You may not find this in the Merriam Webster Dictionary, but I would define an economy as, “A system for the creation of value, and for its distribution to benefit the people.” Too often, we get caught up debating policy, when we’re not clear on the goals they're intended to achieve.

Goals of the Economy

The two objectives of the economy are generally defined in terms of full employment and price stability. Naturally, these are important goals and generally almost everyone would agree that more people having jobs is a good thing, and that we want to avoid massive price increases. These price increases, or inflation, reduces spending power. In a recent podcast I also mentioned a third category, which I’d say is incredibly important. This is the idea of economic productivity. “There are only two ways to grow the economy – by increasing output per person, or by increasing the number of people.”?

Output per person, or productivity, is the value of the goods or services that are created over a unit of time, and overall, we want this to increase. When it increases, more people have jobs, and those jobs are creating more value. We all do better when this value translates into higher wages. It means we’re developing the products and services that add to people’s lives. It also means that we’re getting more efficient at creating and distributing them.

This also leads us to the area of economic growth, and it’s here that we hit the first trade-off we don’t hear politicians explain:

1) As we grow the economy, we deplete our natural resources; yet we need growth so people can sustain their standard of living.

It’s important to recognize that economic growth is desirable for government, and for individual people. A country that has economic growth is in a stronger position to meet its financial obligations, and is in a better position to fund defense, to promote the purchase of goods and services (trade), to fund shared infrastructure, and to provide other programs that support families. For individual people, economic growth means an increased number of employment options, higher wages, and higher standards of living.

Achieving Sustainable Growth

How do we best balance natural resource depletion with the need for economic growth? There are two schools of thought. One is to accept a lower level of growth, and to jettison the related benefits in the standard-of-living. This argument is favored by those seeking the reduction of natural resource depletion, and the mitigation of climate change. The second school of thought favors economic approaches to maintain growth for good livelihoods. I favor the second approach, because it benefits people. I argue that a growth-based approach is best when coupled with market incentives for innovation. Specifically, innovation that leads to natural resource efficiency. ?

At COP21 we saw these discussions play out. There was a great deal of dialogue around required innovation in the energy sector, as well as innovation in transportation, construction, telecommunications, agriculture, and finance. There was also a great deal of debate over the extent to which lower income countries could, or should, reduce their carbon emissions while they’re still trying to provide for the basic needs of their citizenry.

The optimal types of economic growth would include incentives for entrepreneurs that develop novel solutions to:

• Reducing waste;
• Increasing efficiency;
• Re-furbishing and re-using materials;
• Addressing rising sea levels & desertification; and
• Mitigating the loss of plant and animal species.

This type of innovation in a market economy brings new jobs, increasing wages, housing, transportation, energy, food and other goods.

The Role of Government

If we want to move towards this type of “sustainable growth” it is incredibly important that we favor private ownership and individual autonomy. It is through this perspective that we best reflect the sanctity of the individual person:

• Defend individual dignity by supporting individual ownership
• Particularly for those in most need

Private ownership is best directed toward the pursuit of this sustainable growth. This stands in stark contrast with the mistaken rush towards government control of industries. We could easily provide a long list of times during which totalitarian governments have seized control of enterprises that were previously privately owned. These cases have (and are currently having) disastrous consequences.

Centralized control clearly leads to a stagnation in innovation, and does not necessarily lead to natural resource conservation. It inhibits individual creativity and tends towards the repression of individual dignity. It leads towards government that seeks control over the people, as opposed to the empowerment of the people. ?

The creation of more individually owned businesses, and particularly those that lead towards sustainable growth, require the profit motive AND regulation. This leads to our next trade-off that you won’t hear politician explain:

2) Regulating markets is important to protect people, yet too much regulation gets in the way of the business activity that we want.

It’s helpful to think of the economy as a complex spider web of activity which occurs locally, state-wide, nationally and internationally. There are businesses, people, agencies, nonprofits and other institutions. The connections between them include the flow of physical materials and goods (trade), information?(the internet), money (the banking system), and the people themselves moving between locations (migration).

No one article can fully explain industrial regulation, but it’s worth highlighting a few points. First, regulation should be utilized in a manner that helps those in most need. For example, if subsidies are provided, it should work for the benefit of the lowest wage workers, or the lowest income customers. Second, no regulation is perfect, and there are trade-offs. The construction of a pipeline is a great example. The pipeline’s existence could provide many benefits in terms of employment and national defense, while also providing a societal cost that’s less favorable than a project to harness tidal energy. Third, regulation should be used in a way that protects people from bad actors, while (as much as possible) avoiding the red tape scenarios that restrict creativity and entrepreneurship. Fourth, it should be dynamic. When an industry regulation is enacted, it may reflect the time in which it was created, but may not best protect people or cultivate innovation in the future. Social media has been a prime source of controversy, because on the one hand we want free speech, and on the other we need responsibility in reporting accurate information.

Better On-Ramps

Working towards “sustainable growth” and the “right regulation” means that we need more people engaging in the economy, and bringing to market the best of themselves – their intellect, creativity, energy, passion and talent. How do we get more people engaged, productive, and utilizing their talents for even greater outcomes? This is our third trade-off:

3) We need a basic standard-of-living so people can be productive in the workforce; and yet we want to incentivize self-reliance, collaboration, competence and the dignity of work.

It’s unhelpful to create dependency traps, whereby people are uninspired to give their energy towards practical goals that are beneficial to their families or to society. At the other extreme, it’s also unhelpful to create scenarios whereby the innovators and job-creators are not incentivized to contribute in the workplace. During the pandemic we could clearly see that when everyone stays home, we all pay the price.

So, what is the role of social services, and how can it be used in ways that best balance this tradeoff? We have to recognize that there are people who are truly unable to work, and a source of monetary support for them and their dependents is appropriate. For those who are able to work, we need social services that are an on-ramp to individual productivity and ownership.

These “on-ramps” mean investments in education, technical training, and entrepreneurship. It means being intentional about the creation of pathways for people who most need it. It means leveraging their insights towards the next wave of new products and services. We have to be intentional about reaching people on the margins – embracing that it is truly in our best interest to cultivate more innovators. ?

Community over Corporation

When I was in Business School, I remember a short book, entitled the ”The Executive’s Compass – Business and the good society” Here we learned about the trade-offs between individual liberty and social equality. Along this vertical axis, we see many of today’s political battles play out. The most recent is related to vaccination, and the importance of individual decision-making over one’s body and their personal healthcare decisions; versus the need for public health and the containment of the COVID virus. However, we rarely think about the axis between efficiency, or standard-of-living, versus community.?

Community can be thought of as quality of life, and the general well being that people enjoy through their personal, social, spiritual, financial, and familial circumstances. Efficiency can be thought of as the allocation of capital to have products and services provided as inexpensively as possible. It is the call for efficiency that led to the trend towards off-shoring, where the industrial productive capacity was moved out the United States. The result was the loss of jobs, and the availability of many products at lower price points. This is trade-off number four:

4) Achieving a greater degree of well being and strengthening communities, versus allocating resources efficiently

On Balance

When we balance these trade-offs a few critical priorities come into focus. First, a representative democracy bounded by rule of law, is the basis for an economy that works for the people. It is only when we recognize the inherent dignity of each individual, that we accurately reflect their value in the policy decisions we support. Second, we must prioritize the private ownership of business, and provide more ways for more people to share in the dream of ownership. Third, this requires a prioritization of “on- ramps” for those in most need, through entrepreneurship, skills development and education. Fourth, all markets have rules, and they should incentivize innovation in areas with a public benefit.

If we’re targeting an economy that works for more people, it will inherently mean better outcomes for more people. People are better educated, produce more value through their work, tax revenues increase, more funding for is available for sustainable growth, and more people receive a better education. We want more of what works, and what is helpful for more people.

Here’s a partial list of policy implications:

• Invest in education at all levels to increase wage levels
• Increased access to entrepreneurial opportunities and embrace the dignity of ownership
• Programs that reduce red tape for small business owner, and expand their access to knowledge and professional connections
• Banking regulation that supports stability and sustainable growth
• Expand pathways for first time small business borrowers
• Tax regime that stimulates social innovation and individual ownership
• Minimum wages that increase gradually through a linkage to the consumer price index
• TANF and other temporary measures to help get people back to work
• Fiscal policy that is directed towards sustainable growth, and drives efficiency in national government
• Trade policy that strengthens national interests ?
• Immigration policy that allows us to retain more innovators and critical workers
• Technology that provides global solutions to the sustainability challenges of tomorrow, and ushers in a new wave of exports (e.g. Artificial Intelligence, Quantum Computing, Blockchain, Genomics)