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Professor Blinder Shows a Blindness to the Entrepreneurial Spirit

One mustn't reduce the sphere of economic activity from which entrepreneurs can draw sustenance.

1:59 PM, Jul 20, 2010 • By JIM PREVOR
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A government, drunk on deficits and spending, promising to be prudent tomorrow, will be viewed with the same credibility as an alcoholic announcing a plan to go on one last bender this weekend and then be sober. Skepticism is the order of the day.

Professor Blinder chastises the Republicans for inconsistency in urging simultaneously that unemployment insurance not be extended further – which would decrease the deficit -- and that the Bush tax cuts be made permanent – which would increase the deficit.

Yet between these two disparate policies, there is a common thread. Both policies would increase the incentives to work, save, and invest. Unemployment insurance works as a 100 percent marginal tax on getting a job. Its existence and frequent public extensions communicates to people that Uncle Sam will bail you out in hard times so savings aren’t crucial.

Lower marginal tax rates not only make work more financially rewarding but also make investing more profitable. They also communicate – in a tangible way – that society values those who work, save, and produce and wants to encourage them to keep doing so.

In short, the Republican position, even if sometimes incoherently defended, sketches out the rough confines of a society where people are expected and encouraged to take care of themselves and their families, while being given the opportunity to do so, as the government leaves people with most of their money.

In contrast the positions of the Democrats to give out more unemployment insurance and raise taxes is laying out the confines of a different kind of society, in which the government takes care of everyone and taxes away the wealth, and, in doing so, the freedom that would allow people to take care of themselves.

Professor Blinder relies on econometric models for some of his article. Yet those models are not sensitive enough to ferret out what happens to a society when people start believing that entrepreneurialism and savings aren’t valued. The models don’t adjust quickly enough to reflect what happens when people start thinking the government will take care of things.

At one point toward the end of his article, Professor Blinder downplays conservative concerns over the disincentive to work that unemployment insurance creates: “As the unemployment rate rises, the disincentives that worry conservatives become less important because there are fewer jobs to find…” In this line, we see a true conflict of visions about the way the world works. Professor Blinder sees some fixed number of jobs out there and too many people fighting for them.

He thinks that businesses don’t hire more because there is not enough demand for their products. Yet this is an impoverished view of the motivations of entrepreneurs. In my own small business, not one of our products was launched with any known demand, but we believed in our products, and ourselves, and thought we would create the demand. This is not atypical.

When Sam Walton created his first supercenter, nobody in America was clamoring for this, and then it became the most successful retail format in the country. How many years of losses did absorb before demand caught up to the idea? There are no neighborhoods gathering petitions because they lack a pizza place or a great diner or a Chinese take-out – yet they open every day, mostly on the belief of entrepreneurs in themselves and the willingness of friends and family to back a worthy entrepreneur.

The comeuppance of the Democratic positions that Professor Blinder undertakes to defend is that the government, by taking more in taxes and divvying it up as it sees fit among the populace, reduces the sphere of economic activity from which entrepreneurs can draw sustenance. And that will both make society poorer and less free.

Jim Prevor is the founder and CEO of Phoenix Media Network, Inc., a business-to-business media company specializing in the food industry.

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