The following originally appeared on Humanevents.com on July 27, 2012
Not since the 1980 contest between Ronald Reagan and Jimmy Carter has an election presented us with so clear a choice on our nation’s economic future. How do we best return our economy to growth and prosperity? Shall we pursue the American economic model that created the most prosperous nation in history or the European socialist model that produced Europe’s current economic crisis?
Only the private sector can create sustained job growth. All public sector jobs rely on the creation of private sector wealth to support them. Economies create jobs when business owners are willing to risk their capital in a new business or grow an existing business. Business owners invest when they believe they will make a profit sufficient to justify risking their capital, time and energy. To determine whether to take the risk, business leaders create models that forecast what revenues the business will generate and the expenses it will incur to generate that revenue.
The object is obviously to have revenues exceed expenses, resulting in profits. If these profits provide a sufficient return on investment, people will readily invest. This investment is what creates employment. The greater the certainty with respect to revenues and expenses, the greater the investor’s confidence when deciding whether to invest. In this respect, government policy can significantly encourage or hinder investment by job creators. Four economic policies essential to any business decision, and on which President Obama and Gov. Romney differ materially, are taxes, healthcare, energy and labor. The question is which candidate’s policies advance the interests of job creation and economic growth?
Tax policy and small business
Job creators look to after-tax dollars because that’s what they get to keep. Most small businesses operate as pass-through entities known as Subchapter S corporations or LLCs. Business owners use these corporate structures so they can report business income on their personal tax returns and avoid paying both an income tax and a corporate tax on the same income. This is an important tool that President Obama apparently fails to grasp, as his proposal to raise personal income tax rates for people making over $200,000 would raise the tax rates for these businesses and reduce the after tax return on investment that is so vital to employment growth.
Gov. Romney, on the other hand, understands this dynamic because, unlike the president, he has lived it. He proposes lowering marginal income tax rates while preserving tax revenues by eliminating deductions. He understands that intelligent tax policy seeks to maximize government revenues and minimize distortion of private investment decisions, rather than redistributing wealth. The higher the tax rate on the next dollar earned, the lower the incentive to earn it. Therefore, the president’s crusade to increase marginal tax rates will discourage productive economic activity and employment. It is exactly the wrong thing to do if the object is to create jobs.
American businesses are deeply concerned about the significant increase in health insurance costs that will take effect in 2014 under Obamacare. It is very difficult for any labor intensive business – and particularly small businesses that do not keep legions of lawyers and accountants on the payroll – to calculate the Obamacare cost increases because the legislation is so difficult to understand. Both the anticipated cost increases and the uncertainty of their magnitude inhibit the level of business investment.
Gov. Romney has committed to repeal Obamacare and replace it with solutions that address healthcare without crippling the ability of American businesses to grow. He advocates more market-based, consumer-focused improvements in the health care system, which is precisely the opposite of what Obamacare seeks to do. Repealing Obamacare and moving to more effective and economically feasible healthcare solutions would have a tremendously positive impact on job creation and the health of our economy.
Under President Obama, the Environmental Protection Agency has waged a war on carbon fuels in an effort to drive up their costs and make alternative energy sources more attractive. To date, he has only succeeded in increasing traditional energy costs.
Obviously, the heating, air conditioning and transportation costs a business must incur have a direct impact on any business model. For manufacturers and other industrial businesses, an affordable and reliable supply of electricity and natural gas often means the difference between moving jobs overseas and moving them back home. In addition, the price of gasoline impacts what consumers have available to spend and, as such, the amount of revenue a business may anticipate generating in sales.
Gov. Romney has committed to rationalize the approval process for energy exploration and development and to approve the Keystone pipeline. An end to the EPA’s war on fossil fuels would have a positive impact on energy costs and, therefore, on businesses deciding whether to expand and create jobs.
President Obama’s unabashed support of labor unions has also had a dampening impact on job creation. By appointing former union officials and affiliates to the National Labor Relations Board, he has turned it from a neutral board of arbiters to an advocate for big labor.
Individuals considering starting or expanding businesses see an NLRB that is discouraging businesses from moving to right-to-work states while attempting to eliminate the secret ballot in union elections and fast track the unionization process. The contemplated result is higher labor costs and reduced productivity. This may be good politics, but it is very misguided economics. If the goal is to create employment, it defies logic to consistently engage in policies that make labor more expensive and less flexible. Gov. Romney has committed that he will appoint to the NLRB experienced individuals with an even-handed approach to labor relations. He has also committed to defend the secret ballot in union elections.
Obama’s big policy contradiction
Given its economic policies, the Obama administration’s apparent surprise that its stimulus package failed to generate growth is disconcerting. It is unreasonable to tell businesses that you are going to increase their healthcare, labor and energy costs while also increasing their taxes, and then expect that they will invest in growth because of temporary government stimulus spending. That neither makes sense nor is it how business works in the real economy.
Yet, much like President Carter in 1980, President Obama now offers more of the same policies that have failed over the past four years: More government spending, more regulation, and more taxes. When you invest in government, you get, unsurprisingly, more government. That may or may not be a good thing – government does perform necessary functions. But, as the last four years aptly demonstrate, it is far different than creating economic growth and jobs.
Gov. Romney’s economic policies are based on his extensive experience in the private sector and offer a consistent, investment-friendly approach designed to promote growth by relying on our free enterprise system. This is reminiscent of President Ronald Reagan’s approach when dealing with the great economic crisis of the early 1980s, and we have every right to expect that it will be just as successful if Gov. Romney is given the opportunity to implement it.