Entrepreneurs, the Economy and Populist Fits

Many politicians try to get elected or score political points by pushing a populist, envy-driven, anti-wealth agenda.

That’s particularly the case when the economy is in trouble. And the temptation to capitalize on envy and/or tap into hostility against high-income earners has only been magnified with woes in the financial industry and calls for some trillion dollars in Wall Street bailouts from the taxpayers. People should be outraged by the bailouts, but that shouldn’t lead to the imposition of bad economic policies.

We’ve seen this kind of class warfare impulse before, and no doubt, will see it again in the future. But it must be kept in mind that jacking up tax or regulatory burdens on upper-income earners means jacking up costs on entrepreneurs and investors. That’s a bad idea if you want to see the economy get back on track in terms of economic growth and job creation. In addition, wealth accumulation is not bad, as it allows for investments to be made that grow and expand industries and jobs.

But what about those so-called fat cats that just spend money, for example, on yachts? Shouldn’t they pay?

Well, take a look at a cover story on the October 1 USA Today titled “Entrepreneurs struggle to hang on across the USA.” It’s an interesting piece looking at how a handful of entrepreneurs are coping with rough economic times. But in terms of letting populism spread, consider the following:

Benjamin Swift is a commercial diver who cleans hulls on yachts. His business is being hurt because many of the yachts he takes care of are owned by business owners who are being hurt by the credit crunch. "As it gets tighter for them, it gets harder for them to spend money on something like this," he says. He used to employ a couple of divers for his business, but now it's just him. And he's taken on a second job. "I had to let go my employees and scale back until I became profitable," he says. "I'm facing no sales, no business, no nothing."

So, there are much wider ramifications when the wealthy are targeted for some kind of twisted economic retribution.

Like I said, we’ve seen this before. Recall the 1990 tax increase that included a luxury tax, including on yachts. What happened? Wealthy seafarers waded into international waters to buy their yachts, and the boat building industry in the U.S. was socked by lost business and big layoffs.

As I’ve said many times before, envy makes for bad economic policy. That’s worth keeping in mind right now.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council