State of the Union shows Obama is now pro-business. He should be pro-growth.
| Fairfax, Va.
Much is being made of president Obama鈥檚 new-found friendliness toward business, punctuated by his call 鈥渢o make America the best place on Earth to do business鈥� in last night鈥檚 State of the Union address. While moderates seem pleased, liberals dislike it, and conservatives suspect that the president isn鈥檛 sincere.
As an economist, I worry that Mr. Obama is sincere. But my concern about the president鈥檚 cozying-up to business differs greatly from the concern that animates the political left.
Contrary to popular presumption, being friendly to business is not the same as being pro-economic growth or pro-free-market.
Adam Smith explained that a nation is wealthy only if its people have ready access to goods and services that make their lives healthy, comfortable, and enjoyable. The greater this access, the wealthier the nation.
Of course, to make available the goods and services that consumers want requires businesses. Unfortunately, throughout history, businesses have too often been saddled with excessive taxes and regulations in well-intentioned but misguided attempts to help workers and consumers.
Economists (especially the free-market variety) 鈥� concerned always to keep outputs of goods and services as high as possible 鈥� typically defend business against counter-productive government interference. We economists do so, however, not because we have special fondness for business. We do so because we understand that government interference in business often results in fewer goods and services for ordinary men and women 鈥� as consumers 鈥� to enjoy.
In short, an economy鈥檚 success is best measured by how well it pleases consumers, not by how well it pleases businesses.
Surprise: Businesses don't like competition
Each business sees matters differently. It wants to profit as much as possible. In a free market, businesses profit only by pleasing consumers. But a business that obtains special favors from government can profit without pleasing consumers. And it鈥檚 here that trouble starts.
Consider Obama鈥檚 commitment to make America more 鈥渃ompetitive.鈥� (He used variations of the word 鈥渃ompete鈥� nine times in his address as part of his argument that American firms and workers are threatened by their foreign counterparts.) 鈥淐ompetition鈥� sounds good. But businesses don鈥檛 like competition; they like protection from competition 鈥� along with subsidies, special tax breaks, and other government favors that relieve them from the need to cater energetically to consumer demands. So a pro-business president is prone to curry favor with businesses by shielding them from competition.
Tariffs and other import restrictions are examples of pro-business policies. They increase the bottom lines of those businesses that no longer must compete vigorously against foreign rivals. Such pro-business policies are also anti-consumer and anti-market. They rob consumers of choice; they shrink consumers鈥� spending power by enabling protected businesses to raise prices; and they stymie economic growth, in part by channeling entrepreneurs鈥� efforts into lobbying government for favors and away from figuring out how to build better mousetraps.
The irony is that such policies 鈥� which really should be labeled 鈥渃rony capitalist鈥� 鈥� are often labeled 鈥渃ompetitiveness鈥� policies. Because these policies increasethe profits of some domestic businesses, they are mistakenly believed to make the domestic economy more 鈥渃ompetitive鈥� when, in fact, they make it less so.
This abuse of language is further fostered by the habit of speaking of international trade using sports and martial metaphors, such as 鈥渓evel playing field鈥� and 鈥渢rade war.鈥�
Trade: Why everyone wins
Trade, though, is neither a sport nor a battle. It鈥檚 simply what happens when two or more consenting adults exchange with each other on terms that each party to the trade finds agreeable. Unlike in football games or shooting wars, in which the victors win only by making others lose, in trade every party to every exchange wins; every party gains.
And these gains only increase as trade expands across borders. It鈥檚 true, as Obama recalled, that there was 鈥渁 time when finding a good job meant showing up at a nearby factory or a business downtown. You didn鈥檛 always need a degree, and your competition was pretty much limited to your neighbors.鈥� But don鈥檛 be blinded by nostalgia. That was also a time of far fewer miracle drugs, of more expensive clothing, of automobiles that broke down frequently, of televisions that cost an arm and a leg and received only four channels, and of no cellphones, personal computers, and the Internet.
The fact that trade is mutually beneficial means that Obama鈥檚 and others鈥� concern about America鈥檚 increasing trade with foreigners 鈥� especially today with China 鈥� is unjustified. Americans aren鈥檛 losing in these trades, and the foreigners aren鈥檛 defeating us.
Yes, America has a trade deficit. But contrary to popular myth, this fact does not mean that America is economically 鈥渦ncompetitive.鈥�
An American trade deficit means that foreigners are keen to invest in America. And that鈥檚 just what they鈥檙e doing, in a big way 鈥� bigger even than in China, a nation whose impressive economic growth is interpreted by many Americans as a threat to our economy.
Did you know that in the decade from 2000 through 2009, the total amount of foreign direct investment (FDI) received by China was $686 billion, while the total amount of FDI received by the U.S. was $1.8 trillion 鈥� by far the largest inflow of capital from foreigners received by any country on earth? America鈥檚 receipt of FDI dollars exceeded China鈥檚 by 162 percent. On a per-capita basis, the figure is even greater: The amount of FDI America received per person from 2000 through 2009 was ten times (!) greater than was received by China.
So when Obama said in his speech on Tuesday night that 鈥淲e need to out-innovate, out-educate, and out-build the rest of the world,鈥� he wrongly implied that America currently doesn鈥檛 do so well in the international economy. But it does 鈥� which is not to say that there isn鈥檛 a lot of room for improvement.
The president is correct that tax and regulatory reforms 鈥� along with reining in Uncle Sam鈥檚 deficit spending 鈥� are in order. Especially welcome is his call to lower corporate tax rates. And if calling such reforms 鈥渃ompetitiveness policies鈥� improves their chances of being implemented, I鈥檓 all for it.
But let鈥檚 not be fooled into thinking that America鈥檚 current economic troubles are caused by America鈥檚 open participation in global trade. Keeping straight about this fact will guard against our turning a blind eye to politicians who try to pass off policies that are pro-business as policies that are pro-growth.
Donald J. Boudreaux is professor of economics at George Mason University. He is the author of 鈥淕lobalization.鈥�
