Commentary by Kevin Hassett
June 22 (Bloomberg) -- In his landmark 1942 book, “Capitalism, Socialism, and Democracy,” economist Joseph Schumpeter emphasized the key role that creative destruction plays in generating long-run economic growth. It is the driving force of capitalism.
There have been numerous accusations that President Barack Obama is intent on reforming America as a socialist nation. Obama himself may have fed the beliefs with his own words, saying, as he did, that he believes government should “spread the wealth around.” He also said, back in 2003, that he favors a single-payer system for American health care.
Former Vice President Dick Cheney, asked recently about Obama’s “socialist” policies, responded, “I agree with the criticism without using the labels.”
Most of Obama’s policies to date are very far from the socialist ideal. They may well move the economy in a direction that a conservative might oppose, but they do not revive the model of the Soviet Union either.
Still, there is one aspect of Obama’s policies that gives a student of Schumpeter great pause, and perhaps even some sympathy for Cheney’s answer. Obama and his team seem sharply opposed to the view that creative destruction is a valuable economic force. They seem happy with what might be called destructive destruction -- the obliteration of value and wealth without any resulting positive change.
Creative destruction describes the painful effects of innovation and progress. Sometimes great inventions wipe out the existing economy, just as the Internet may be killing print newspapers. In other cases, economic failure clears the way for competition among inventive newcomers. In both scenarios, the nimble and inventive replace the calcified old guard, eventually moving economic welfare to a higher level.
No Bank Innovation
The Obama administration has regularly opposed changes that might ignite a positive wave of creative destruction. Banks, for example, engaged in imprudent practices that pushed them toward the brink of bankruptcy. Where are the new innovative banks to replace them? They don’t exist, because private capital can’t compete with the enormous subsidies flowing from the government to the diseased dinosaurs.
Make no mistake, there is destruction: investors have seen their wealth destroyed. But the government’s actions have prevented any creative outcome.
Revolutionary Automobile
Imagine the wave of innovation that could be set off if General Motors Corp. and Chrysler LLC were allowed to fail. Existing firms, such as Ford Motor Co., Honda Motor Co. and Toyota Motor Corp., would have vast new markets to compete for. New firms, such as Tesla Motors Inc., whose Model S may well be the most revolutionary automobile to hit the market since the Model T, would not have to compete against cheap, subsidized government-made cars.
Instead they do have to compete, because it is just unthinkable for Obama to force his unionized political allies to make any sacrifices.
Obama is opposed to letting failure produce space for creation, but he also is opposed to innovative creation that would have destructive repercussions. He has proposed large new increases in business taxes to extract the profits that motivate innovators, and he signaled a willingness to force firms to share their wealth with a resurgent organized labor.
The actions of Obama and other Democrats speak volumes. They are supporting so-called card-check legislation, which would make it easier for unions to organize workplaces. And a provision in the Federal Aviation Administration reauthorization bill passed recently by the House appears to have been specifically designed to allow the Teamsters union to organize FedEx Corp.
Tax on Success
The message is clear. If you succeed and become profitable, Obama will take a big share of your profits for the federal government and give another big share to the unions.
The scale of the combined tax that results from this is hard to fathom. Federal Reserve economist Bruce Fallick and I estimated in a research paper published in 1996 that unions tend to successfully extract from firms about a third of their profits. Unions seem to calculate their wage demands based on a firm’s profits.
In the new world that Obama is preparing for us, where unions can organize almost everyone, the tax rates from states, unions, and the federal government will approach 70 percent.
Again, there’s the destruction. It is the wealth of entrepreneurs that is destroyed.
Such policies will chase the ambitious away from the U.S. and leave the long-run economy a stagnant mess.
Path to Socialism
Socialist states emerge over time because entrenched interests like organized labor achieve a position from which they can extract extra sustenance from successful firms. Workers who have won a higher wage than their productivity would rationalize do not want old things to die, or new things to be created.
Whether he is socialist or not, by embracing the idea of destructive destruction, Obama is giving such stakeholders exactly what they want, and threatening to suck the vibrancy out of our economy.
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