What role should the government play in small business owners’ economic life? It seems that with the Trump tariffs are at tax that the government is putting on all our lives, but should it just stay out of it?
On The Small Business Radio Show this week, Sen. Phil Gramm describes evidence points to government interference and failed policies that pose the most significant threat to economic freedom.
Gramm, who has a long history in U.S. politics, having served in both the House of Representatives and the Senate, joins my conversation with Don Boudreaux, who is an economist and professor at George Mason University. They have a new book called “The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism”.
The Role of Government in Economic Life
I asked Gramm about the appropriate balance of government involvement in the economy. Gramm asserts that the government should primarily enforce the rule of law while allowing the private sector to thrive. He believes that economic freedom is the cornerstone of American exceptionalism, contributing to the nation’s wealth and power. Gramm emphasizes that the more freedom individuals have to pursue their economic interests, the better off society will be as a whole.
Key Points:
- Government’s Role: Enforce the rule of law, protect property rights, and ensure fair competition.
- Economic Freedom: Essential for innovation, entrepreneurship, and overall societal wealth.
Defining Economic Freedom
When asked to define economic freedom, Gramm explains that it encompasses the right of individuals to utilize their abilities to improve their lives and those of their families within a legal framework. He argues that true success comes from producing goods and services that others value, contrasting this with the notion that only government or criminals can gain without contributing.
Key Points:
- Individual Rights: Freedom to use one’s talents and resources to create value.
- Legal Framework: Ensures that economic activities are conducted fairly and ethically.
Debunking Myths of American Capitalism
Boudreaux introduces the first myth from their book: the “Genesis Myth,” which claims that the Industrial Revolution impoverished workers. He argues that this narrative is a fallacy. While the Industrial Revolution did lead to significant economic growth, it did not come at the expense of the working class. In fact, data shows that ordinary people during this period experienced improvements in wealth, working conditions, and life expectancy. Boudreaux highlights that the wealth generated by capitalism has historically led to better living standards for all.
Key Points:
- Genesis Myth: The Industrial Revolution improved, rather than worsened, the lives of workers.
- Economic Growth: Leads to better living standards and working conditions over time.
The Great Depression and Capitalism
The discussion shifts to the Great Depression, with I ask Gramm why it is often viewed as a failure of capitalism. Gramm argues that it was, in fact, a failure of government policy, particularly in monetary policy and the implementation of the Smoot-Hawley Tariff, which exacerbated the economic downturn. He explains that the Federal Reserve’s failure to provide liquidity during the crisis led to widespread bank failures and prolonged the depression. Gramm notes that other countries recovered more quickly due to different policies, while the U.S. did not fully escape the depression until the 1950s.
Key Points:
- Government Policy Failures: Poor monetary policy and protectionist tariffs worsened the Great Depression.
- Federal Reserve’s Role: Lack of liquidity provision led to bank failures and prolonged economic hardship.
Tariffs and American Manufacturing
I raise the issue of tariffs, particularly in the context of President Trump’s protectionist policies. Boudreaux asserts that the belief that trade is hollowing out American manufacturing is a myth. He cites data showing that American industrial output and manufacturing capacity are at all-time highs. He argues that tariffs, which increase costs for American producers, ultimately harm manufacturing rather than help it.
Key Points:
- Trade Myths: American manufacturing is thriving, contrary to protectionist claims.
- Tariffs’ Impact: Increase costs for producers and harm the broader economy.
Deregulation and the Financial Crisis
The conversation then turns to the myth that deregulation caused the financial crisis of 2008. Boudreaux contends that there was little actual deregulation, and the crisis was primarily a result of government policies aimed at artificially stimulating homeownership. He explains how government-backed organizations like Fannie Mae and Freddie Mac lowered lending standards, leading to a cascade of risky mortgage lending that ultimately collapsed.
Gramm supports this view, clarifying that the Gramm-Leach-Bliley Act did not deregulate the banking industry as commonly believed. Instead, it recognized the reality of large financial institutions operating across different sectors. He emphasizes that the crisis was not caused by deregulation but by government policies that pressured banks to make risky loans.
Key Points:
- Deregulation Myth: The financial crisis was driven by government policies, not deregulation.
- Government-Backed Lending: Lowered standards led to risky loans and the eventual collapse.
Poverty and Capitalism
Finally, I ask about the myth that poverty is a failure of American capitalism. Gramm argues that even the poorest Americans today are among the wealthiest globally, and the perception of poverty often stems from measurement failures. He explains that when accounting for taxes paid by high-income earners and government transfers received by lower-income individuals, the gap between rich and poor narrows significantly. He asserts that hard work and responsible living can lead to prosperity in America, a narrative that has historically held true.
Key Points:
- Poverty Myth: American capitalism has significantly reduced poverty levels.
- Wealth Distribution: Government transfers and taxes narrow the income gap.
Conclusion
As the episode wraps up, I asks both guests what they hope readers will take away from their book. Gramm emphasizes the importance of setting the record straight on economic myths and fostering a greater appreciation for freedom within the rule of law. Boudreaux echoes this sentiment, highlighting the need for a fact-based alternative narrative to the conventional wisdom taught in schools.
Actionable Takeaways:
- Understand Economic Freedom: Recognize the importance of individual rights and a fair legal framework in fostering economic growth.
- Question Common Narratives: Be critical of widely accepted myths about capitalism and government intervention.
- Appreciate Capitalism’s Benefits: Acknowledge the historical and ongoing improvements in living standards driven by capitalist principles.
- Advocate for Sound Policies: Support policies that enhance economic freedom and avoid those that impose unnecessary burdens on businesses and individuals.
Listen to the entire episode on The Small Business Radio Show
This article, “Sen. Phil Gramm Debunks Tariffs and the Seven Great Myths of American Capitalism” was first published on Small Business Trends
Source: Small Business Trends
