Capital is Good; the “Buffett Rule” is Not

The Washington Post published my editorial on the “Buffett Rule” — a proposal from President Obama to hike the effective capital gains rate on large payouts. I wrote that over time this would hurt technology startups because it increases the cost of capital and lowers the pool of available funds.

The editorial has provoked some vigorous debate. Reader comments in the Post have been mostly negative, which comes as no surprise given that the publication’s audience likely tends toward left-of-center readers and DC insiders. Here’s a quick roundup of responses:

  • Post columnist Ezra Klein responds to my editorial by ceding that my argument (i.e. the Buffett Rate is a capital gains hike that would diminish the investment pool for tech startups) might be correct, but then asserts we ought to tax the rich more anyway and concludes the logical way to protect tech is via a subsidy.
  • MotherJones’ blogger Kevin Drum covers a lot of ground in 3 paragraphs, saying higher capital gains rates don’t really impact investment, implying that there should be taxes on unrealized gains, and concluding that cap gains rates ought to be “maybe 30% or so” with no explanation offered as to why. Yikes.
  • Over at the Heritage Foundation, Mike Brownfield writes that the experience of California further serves to enhance my point. The Golden State, he notes, has relied heavily on taxation of the wealthy for revenue, and as a result has experienced wild boom-or-bust swings depending on the stock market.

My editorial stands on its own, and I don’t see a reason to amend it other than to point out that it’s a case study of the tax proposal’s unintended consequences on one industry. But a broader macro-economic analysis of Warren Buffett’s idea leads me to the same conclusion. Why? Because of several broad and simple principles:

Capital is good. Our country needs capital. Capital makes the economy grow and allows businesses to start and expand. All the political rhetoric is about taxing “millionaires” and “billionaires,” but the proposal really is about taxing capital. Passing this plan means that more capital will be taken from the (productive) private sector and given to the (unproductive) public sector.

Capital is fluid. National capital gains rates do not exist in a vacuum. If rates go too high, capital will leave our country in search of more fertile ground. Our nation’s 15% federal rate is the 4th highest of G7 countries (according to a 2009 study), and many developing countries have rates around 0%. It’s hard to conclude that our rates are too low when benchmarked globally.

Capital is property. What’s getting lost in the debate is that this discussion centers around seizing private property. Politicians and pundits engaging in “sticking it to the fat cats” rhetoric seem almost gleeful about taking away capital gains. While taxation is obviously legal, it ought not be flippant.


Entrepreneurs: Startup Visa is Great. Now, How About Taxes?

The startup world has been buzzing this week after Sens. John Kerry and Dick Lugar introduced the Startup Visa Act of 2010. According to TechCrunch:

“[The bill] would create a two year visa for immigrant entrepreneurs who are able to raise a minimum of $250,000, with $100,000 coming from a qualified U.S. angel or venture investor. After two years, if the immigrant entrepreneur is able to create five or more jobs (not including their children or spouse), attract an additional $1 million in investment, or produce $1 million in revenues, he or she will become a legal resident.”

Paul Graham of YCombinator hatched the visa concept in April of last year. The cause was picked up by Eric Ries, Dave McClure, and several other tech thought leaders, who launched the blog and recruited many of the best and brightest in the industry (including Reid Hoffman, Mike Maples, Chris Sacca, Josh Kopelman, and Chris Dixon) to support the cause.

And allowing hard-working immigrants to move to America to create jobs is indeed a good cause. I’m not sure that I’d go so far as the TechCrunch guest writer who implied that only xenophobes could oppose it, but overall importing the world’s entrepreneurs into America is a decent idea. Let’s take all the intelligent, hard-working innovators who want to come here legally that we can get.

Fantastic. But once the congratulatory back-slapping ends, I have a question for the entrepreneurial community: what about taxes? I don’t hear a lot of my fellow entrepreneurs talking about tax rates, and their silence is deafening.

The federal capital gains tax rate is set to rise from 15% to 20% next year, and President Obama previously indicated he’d entertain something in the 25%-28% range. Meanwhile, according to the Tax Foundation, America has the second highest corporate tax rate in the world, trailing only Japan, and 24 states actually have higher rates than Japan. (Thanks to Dave McClure for the link.)

According to the Cato Institute, studies in comparative economics suggest that “total government spending (federal plus state plus local) should be no lower than 17 percent, nor larger than about 30 percent of GDP.” They cite an analysis by the Institute for Market Economics in Sofia, Bulgaria, that concluded that “there is a 95 percent probability that the optimal size of government is less than 25 percent of GDP.”  As of last year, the US stood at 36%.

America is comparatively over-taxing its companies and capital. Importing entrepreneurs is great, but it’s also muted when the government’s punitive tax code undermines incentives to invest.

So, entrepreneurs, what are you going to do about it?

The Moral Case for Capitalism

Here’s the video of my speech, “The Moral Case for Capitalism,” that I gave at the NFRA National Convention in Reno, NV last Saturday. The videos are divided into three parts. The text of the speech (including references) is pasted below.

Thank you, Rod, for that kind introduction. It’s good to be here in Reno today, and I’m excited to have this opportunity to speak to all of you. I’d like to take a minute to thank the NFRA executive board for inviting me, and Executive Vice President Chris Brown for arranging for me to be here. And thanks to all of you for getting up early to join me. I know how tempting it must have been to sleep in or stop off at the slots. I didn’t feel any temptation to hit the slots, though. They gave me a room on the 13th floor. I took that as a sign to stay out of the casino and practice my speech.

I’m here to make the moral and biblical case for capitalism. But before I dive into my topic, let me give you some additional background to explain why I’m so passionate about this topic. I’m not from Washington and I’ve never spent time inside the Beltway. My entire career has been in California, on the opposite side of the country from DC. Early in my career I quit a stable job in finance to join a little-known Silicon Valley startup called PayPal. Over the years that followed—as I detailed in my book, The PayPal Wars—our team took the dot-com from losing $10 million a month to profitability, an initial public offering, and an acquisition by eBay in late-2002. Soon after eBay purchased PayPal, I left to start my own company, World Ahead Media, a publishing startup with a conservative and free market focus. World Ahead was acquired by WorldNetDaily last year and renamed WND Books.

The reason I mention all of this is to make the point that I’ve seen firsthand what entrepreneurship in a capitalist economy can accomplish. I’ve seen how jobs are created, how good companies are built, and how the amazing power of the free market can be harnessed. So it disturbs me to watch as the free enterprise system comes under attack from liberal politicians in Washington DC, people who know nothing about capitalism, except that they want to control it.

During his campaign for president last year, Barack Obama told John Harwood of CNBC that he believed in capitalism. He said, “I am a pro-growth, free market guy. I love the market. I think it is the best invention to allocate resources and produce enormous prosperity for America or the world that’s ever been designed.”[1]

But since President Obama was sworn in last January, the federal government has expanded its control over private enterprise on a scale not seen in several generations. Under the guise of solving the economic crisis created by the mortgage meltdown, Washington DC is now vastly increasing its involvement in the banking, automotive, energy, and health care industries. New bureaucracies are being proposed, and Congress is on a spending rampage. The federal deficit is expected to average over $1 trillion per year for the next decade. Congress is even debating a bill that would “allow the government to create a detailed set of standards for cybersecurity, as well as take over the process of certifying IT technicians.”[2]

Yes, really. Washington wants to run cybersecurity. And we thought Windows Vista was bad!

In the words of the Wall Street Journal’s Kimberly Strassel, the Beltway has manufactured a “creative history” that says greedy bankers got out of hand so we need more regulations and less freedom.[3]

In this atmosphere, it’s not surprising that Ron Bloom, the White House’s manufacturing czar, recently said in a speech that, “We know that the free market is nonsense. We know that the whole point is to game the system… We kind of agree with Mao that political power comes largely from the barrel of a gun.”[4]

While one White House czar is quoting Mao Tse Tung, another czar is micromanaging executive salaries. And another czar is overseeing the auto companies. There are czars for health care, information technology, and general technology. There are a couple of economic czars.[5] And there was a czar for green jobs, but that spot’s vacant now.

It seems like every aspect of the economy is suddenly being managed by DC bureaucrats. While I’d like to think that these policies reflect only the sentiments of extreme left-wing ideologues in Washington, the truth is that capitalism is under fire more broadly. An April poll by Rassmussen revealed that “only 53% of American adults believe capitalism is better than socialism.”[6] One-fifth of all Americans say that socialism is better, and 27% aren’t sure. Adults under-30 are evenly split, with 37% opting for capitalism vs. 33% for socialism.

Earlier this year, Newsweek ran a cover story entitled “We Are All Socialists Now.” While that’s mostly wishful thinking on the part of Newsweek’s editorial staff, the unpleasant truth is that capitalism has a major image problem. And unless those of who believe in traditional values and a limited government speak out and rebut the critics of capitalism, the situation will not improve.

Part of that answer is properly explaining what caused last year’s financial crisis. To be blunt, John McCain and George Bush failed to do this, hence the Left’s “creative history” has become the accepted narrative. Since NFRA members are an educated group, I won’t spend much time recounting how the federal government—through the Community Reinvestment Act, Fannie Mae, and Freddie Mac—distorted the mortgage market and helped create the sub-prime time bomb that detonated over the past couple of years. Stanford economist John Taylor, in a short book entitled Getting Off Track, also demonstrates how bad monetary policy by the Federal Reserve created the real estate bubble.

While it’s important to understand how bad fiscal, regulatory, and monetary policy created the financial crisis, defending the free market requires more than a “policy wonk” response. Demonstrating that government meddling in the economy had unintended consequences is important, but it’s not the same as articulating the virtues of the free market.

The critique against capitalism goes far beyond just blaming it for the current recession. Critics today go so far as to say that the free market is contrary to the Bible, that it is cruel, exploitative, and the cause of so much poverty and suffering around the globe. In a word, they are saying that capitalism is evil.

It’s important to answer this accusation. Today we have an entire generation of voters who do not remember Ronald Reagan, much less the harm collectivism did to the countries behind the Iron Curtain. Capitalism does not have the moral high ground in their eyes, nor does socialism seem inherently wrong. In our current political and cultural environment, the argument for the free market needs to be made afresh. Fortunately, it’s an easy one to make. Capitalism is the most moral and fair economic system ever devised by man. In short, capitalism is good, and proving this is not hard. I’m going to present three points that make this case:

  • First, capitalism was inspired by biblical principles; it’s an economic system based on the teachings of God’s word.
  • Second, capitalism runs on win-win transactions; it’s an economic system that produces a positive sum gain and rewards those who help their fellow man.
  • And third, capitalism has blessed the world; it’s an economic system that has lifted billions out of poverty while changing the course of human history.

We’ll address all three points in turn.

Point #1: Capitalism was inspired by biblical principles.

Let me emphasize that no economic model is specifically prescribed in the Bible. In the Old Testament, God did articulate a number of rules for the Hebrew economy, but the New Testament doesn’t contain directions for how countries should set up their economic systems. The teachings of Christ and his followers are primarily concerned about the message of eternal salvation. However, the origins of the free market are undeniably rooted in principles contained in God’s word.

Unlike Marxism, which was dreamed up in the heads of philosophers, capitalism came about in a hodge-podge fashion in England during the 17th through 19th centuries and gradually spread through the Continent, replacing mercantilism and what was left of feudalism as Europe’s dominant economic system. But even though it has decentralized origins, the reasoning behind the free market comes from one primary source: the Good Book.

Economist Joel Mokryr, in The Lever of Riches, writes: “Western Christianity contained the seeds of future technological progress.” Mokyr and other economic historians, including Walter Russell Mead, document how Christian beliefs coming out of the Reformation led to the advent of capitalism. Some of the most prominent ones include:[7]

  1. Private Property: The Bible establishes property rights as belonging to all people, regardless of power, so much so that it’s one of the Ten Commandments. (“Thou shall not steal.”)
  2. Humanity’s Role in Creation: The Bible distinguished between the Creator and his creation, liberating humanity from the fear of pantheism and superstition, empowering us to make use of the resources around us.
  3. Hard Work and Good Stewardship: The Bible calls for honest labor and a modest lifestyle. This promotes savings and investment, which creates a capital pool to finance new ventures in a free market.
  4. “The Faith of Abraham:”Abraham is known as a man of faith for following God’s call to leave his familiar settings and journey to an unknown land. To people this meant it was OK to strike out on a new path, to follow God’s calling into a new area or a new profession, and break with the traditions of the past.
  5. Optimism for the future tempered by original sin. The Bible says we’ll never have a utopian paradise on this earth, but the world can be made better by exercising God’s principles.

These are just some of the Christian beliefs that inspired this new economic system. To be sure, other factors, especially the political fragmentation of Europe, set the table for capitalism to spread, however it was the Bible that laid the intellectual framework for the free market. From property rights to the use of natural resources, from the call to innovate to the concept that the individual isn’t bound by tradition, capitalism came from a distinctly biblical heritage.

Point #2: Capitalism runs on win-win transactions.

The building blocks of capitalism are voluntary transactions by buyers and sellers. When two parties voluntarily transact with each other, both are better off, even if they’re just looking out for themselves. Adam Smith, writing in The Wealth of Nations, famously noted that: “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest.” Even if a selfish, imperfect person is only looking out for himself, he’ll have to offer some benefit to another person if he’s going to get them to agree to transact.

Jay Richards illustrates this in his recent book, Money, Greed, and God.[8] He recounts the “trading game” he played in his 6th grade class. In this example, the teacher hands out dime store toys randomly to all the children. The kids are then asked to write down, on a scale of 1 to 10, how much they liked what they received. After the teacher tallies and averages the scores, she gives them the option to trade their toys. No one is forced to do so, but everyone has the right to negotiate voluntary trades with their classmates. After the bartering is done, the teacher has the kids write down their satisfaction scores again, and this time the average is higher, demonstrating how voluntary transactions are win-win.

In capitalism, buyers and sellers, guided by what Adam Smith called the “Invisible Hand,” use freedom to create value for both parties. But, as economist Joseph Schumpeter would later point out, it’s innovation that creates the most value. There’s a tremendous financial incentive to come up with a new product, invention, or method that shakes up the marketplace and benefits as many people as possible. Schumpeter called this process “Creative Destruction,” saying that it “incessantly revolutionizes the economic structure from within, incessantly destroying the old one.”[9]

Creative Destruction is what has led the economy forward, and made the capitalist system one of constant innovation. While socialist countries often struggle just to feed their people, nations with economic liberty have produced an explosion of knowledge, technology, and innovation over the past century.

Point #3: Capitalism has blessed the world.

Finally, it must be emphasized that capitalism is more than just a system based on biblical principles, comprised of win-win transactions. The free market has unleashed economic growth and global prosperity in a way never before seen in human history. In short, this biblically inspired system is a blessing to the world.

Looking back across the millennia, the history of the world is one of economic stagnation. Before capitalism, economic growth and rising standards of living were not the norm.

Angus Madison, professor emeritus at the University of Groningen in the Netherlands, has estimated the world’s historic economic output. Before capitalism, in the 5 centuries between A.D. 1000 and 1500, the world economy took 500 years to double in size. But as capitalism began to spread in Europe during the 19th century, the world economy nearly tripled in just 80 years. And that growth further accelerated as the free market spread; during the 20th century, the world economy grew by 17 times.

We’ve certainly been blessed with prosperity from capitalism here in United States. GDP per worker in America rose from about $15,000 in 1900 to $65,000 in the year 2000.[10] And this prosperity has been widespread. While not everyone shares equally in the outcome of the free market, U.S. income levels for the lowest quintile have risen over time. And poor households in a capitalist country like ours have done very well by historical standards:

  • 99% of poor households in the US have a refrigerator.
  • 97% have a color TV, and 63% have cable.
  • 73% have a car, and 31% have two or more cars![11]

But it’s not just here in America that we’ve seen the blessings of capitalism. Between 1970 and 1990, the number of people living below the absolute poverty line declined from 38% of the world’s population to 26%, even as the global population grew substantially during that time.

If anything, what’s keeping certain parts of the world poor is too little capitalism! Peruvian economist Hernando de Soto estimates that a lack of property rights robs Third World citizens of over $9 trillion of wealth.

The growth of income caused by capitalism has blessed the world by creating a rising standard of living and, as result, increased life expectancy. According to, in 1850 the average life expectancy in nearly all countries was between 30 and 40 years. (That would make me a senior citizen!) Today, most countries have life expectancies between 65-80 years.

To summarize, capitalism has introduced widespread economic growth. It has lifted billions of people out of poverty. It has fed the hungry. It has created new technologies. It has lengthened people’s lives. Capitalism has blessed the world.

This response to the critics of the free market is powerful. While no one should claim that capitalism is perfect—no human institution is perfect!—it is the best economic system available to man. The free market is based on biblical principles, it runs on win-win transactions, and it has improved the plight of people all around the world.

The same cannot be said of centralized economies. Call it communism, socialism, or whatever you like, but the results of experiments in economic centralization are always the same: stagnation, suffering, and quite often death.

The Black Book of Communism, published by Harvard University Press, estimates that nearly 100 million citizens of communist countries were killed by the own governments in the 20th century. 100 million lives snuffed out by an economic system that puts massive power into the hands of elites.

The Bible says that humanity is fallen and sinful, so it’s no wonder that a system that centralizes power results in tragedy. Capitalism disperses power, uses a decentralized marketplace, protects property rights, and allows humans—who are made in the image of their Creator—to be creative. Socialism brings calamity, but capitalism promotes flourishing.

So let’s make this case to our fellow Americans. Let’s answer the critics who call for more government control in our lives. Let’s articulate why the free market is virtuous.

Capitalism is one of the most important institutions in human history. It’s worth fighting for!

Thank you.








[7] Sources: Joel Mokyr, The Lever of Riches, pp. 201-205. Jay Richards, Money, Greed, and God, pp. 145-151.  Walter Russell Mead, God and Gold, pp. 191-247

[8] Jay Richards, Money, Greed, and God, pp. 60-61.

[9] Joseph Schumpeter, Capitalism, Socialism, & Democracy.



Gallup: 6 in 10 say government is doing too much

Gallup reports a 10 year high in the number of Americans (57%) who say the government is engaging in affairs better left to the private sector. The prior high of 60% was set in 1995, during the first term of the Clinton administration. Additionally, on the question of governmental regulation of business and industry, a new Gallup high (45%) said the government was doing “too much” to oversee commerce, compared to 24% who said too little.

No doubt this shift in public perception comes from Washington’s expansive involvement in the banking, mortgage, automotive, energy, and health care industries. Recent comments from President Obama suggest he’s open to aid for the newspaper business, suggesting that our elected officials are tone deaf to the discontent that’s beginning to form around the country.

Stimulated? No, me neither

Economics and entrepreneurship go hand-in-hand. While I’d wager that most people starting companies spend little time thinking about economic theory, their daily reality is an exercise in unleashing what Joseph Schumpeter called the gales of “creative destruction.” Entrepreneurs usher in change and innovation, which are the driving forces of economic growth and job creation. Given this, it seems appropriate to visit the topic of economics on this blog, especially given the nature of the policy changes being discussed in Washington DC.

PiggyBankRepairI was pleased to see that my undergrad thesis advisor, Hoover fellow John Cogan, co-authored an op-ed in Thursday’s WSJ entitled “The Stimulus Didn’t Work.” Along with John Taylor (the Stanford professor who wrote Getting Off Track, which makes the convincing case that monetary policy errors led to the housing bubble) and Volker Wieland, Cogan breaks down the Q2 rebound in GDP and shows that consumption didn’t rise as the forecasts of the Obama Administration predicted.

Liberals tend to invoked the fiscal policies of John Maynard Keynes as the remedy for economic downturns. Keynes advocated government spending as a means of priming the pump to generate consumer demand. Obama’s near-$800 billion stimulus plan is the largest recent example of this kind of demand-side policy. Keynesian theory goes that in a downturn, the government can stabilize the economy through all sorts of public works and transfer payments, which in turn improves cashflow and serves as a jump start for economic growth. To put it in business terms, Keynesians seem to view the economy as operating on a cash basis, so transfer payments from the government should prompt consumers to spend again and break the vicious downward spiral caused by an economic shock.

It’s an elegant theory, but it’s also wrong. As Cogan, et al, demonstrate in their editorial, Obama’s stimulus has not stimulated consumer spending — nor did the stimulus plan signed by George W. Bush in 2008. A major reason why demand-side stimulus doesn’t work is the permanent income hypothesis, which was articulated by Milton Friedman. This hypothesis says that people don’t change their behavior due to one-off occurrences, but rather base their economic decisions on what they perceive to be their long term prospects. Hence it’s no surprise that American consumers, who are in the process of de-leveraging and increasing their savings rate, did not respond to the roll-out of the stimulus by spending more. The current rebound in the economy can be traced to a rebound in business activity, which is generally the case following a recession, since companies that slashed inventories during the downturn have to build them back up as the business cycle improves.

Keynes may have given the dismal science some valuable insights, but his modern disciples need to rethink his policy prescriptions.

I suspect that many politicians who advocate Keynesian fiscal policy during recessions have an unstated ulterior motive, namely increasing government control over the economy. Massive stimulus does this in two ways: 1) it expands the government’s reach into the private sector, giving it greater influence over more entities than were previously beholden to it, and 2) it promotes the misleading narrative that government rode to the rescue to clean up the excesses of the free market.

This is why entrepreneurs should be concerned with economic policy. Expansive governmental involvement in the economy hinders growth and innovation. A study released earlier this year suggests that the optimum size of government is less than 25% of GDP, whereas the U.S. is at 36% and rising. Big government chokes out entrepreneurship and tilts the playing field in favor of big business (e.g. Europe). And the projected massive budget deficits being run up in Washington will make it harder for entrepreneurs to obtain capital in the years to come. It’s not a pretty picture, especially since we now know that the economy bottomed out and stabilized with no help from the stimulus package.