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Time To Celebrate Business

July 8, 2008

Tags Booms and BustsFree Markets

 

I admit to liking one aspect of our recessionary environment. It focuses the mind on what really matters, so that we are just a bit less likely to take wealth for granted. This is a tendency of everyone who lives in a booming economy: we tend to think of the wealth that surrounds us as a fixed part of nature, something that is not going away and can therefore be toyed with and manipulated by state actors.

People indulge in every sort of political fantasy about redistributionism during good times, but these fantasies evaporate once it becomes clear to us that wealth can vanish far more quickly than it came. Employees are laid off out of necessity, and then the businesses themselves start to fail. People's lives are disrupted, and economics suddenly takes on a new importance. We begin to see just how important it is that we get the goods and services we need, that our jobs are secure, that we can make our dreams reality.

The tradeoffs associated with enterprise become ever more obvious in recession. A slight uptick in the price of raw materials can cause an enterprise to take a fall. New legislation that increases the cost of labor can yield unemployment. Programs such as Social Security that tax the heck out of business and labor are more easily seen as drains on productivity than social benefits. And when our stocks tumble, we are slightly more likely to cheer on producers than to imagine ways that we can slice and dice them.

If we really understand the message of an economic downturn, we would all become pro-producer and antigovernment, for it is government that is to blame for interrupting the progress of free enterprise. It does this by increasing the costs of wealth production, and by tricking producers through the manipulation of interest rates, generating the boom, which is followed by the bust. What's more, government's existing costs of doing business inhibit recovery. Imagine if we lived in a pure market economy without taxes and regulations of any sort. Anyone could start a business and keep their earnings. That recovery would happen quickly is without question.

But today government adds enormous costs to doing business successfully. Hiring is inhibited by wage laws, mandated benefits, antidiscrimination laws, payroll taxes, and fantastic costs associated with accounting and compliance. It differs according to the business, but all such costs are far higher than they ought to be. One reason that the recession of 1921 went away is precisely because we weren't yet saddled with a central-planning apparatus, and prices and wages were given the freedom to adjust. These days matters are much more complex and costly, which is one reason we all fear that recovery will not be quick.

Listening to the presidential candidates, we would have no inkling that it will be private producers and only private producers that will lift us out of the economic doldrums. To hear their speeches, you would think that government is capable of pushing the right buttons to restart the economy.

But here is the fact: government has never done anything to bring about recovery and it never will. The best course for the political establishment is to recognize that recessions represent their own failure and then conclude that getting the state out of the way is the best course of action.

The process of wealth creation is far too complicated and difficult for the political class to understand. Consider just one sector: the wine industry, which Forbes has covered in detail in its latest issue. People imagine that the wine business involves luxuriating in a beautiful home in an idyllic environment, sipping vintages on a big porch, and basking in the status that comes from being an owner of land.

In fact, it is grueling and risky business that can cost tens of millions of dollars and take upwards of seven years before a single dime of revenue comes your way. There are the inherent costs associated with buying land, planting, vines that must be tended, waiting, and harvesting. There are tasting rooms to build. Then there is the problem of marketing, since wine doesn't just sell itself. The competition is grueling and what appears to be a breakthrough doesn't necessarily last.

On top of an already expensive process is added the regulatory environment. As Forbes says,

Producing and selling an alcoholic beverage in America is a complicated endeavor wrapped in layers of tangled red tape. There are licenses and permissions to be acquired from the Alcohol and Tobacco Tax and Trade Bureau (TTB), and even a long, complex process through which the label for the bottle must be approved by the TTB. That's all before you have to start tracking sales and computing and paying excise taxes.

Have a look at the Frequently Asked Questions at the website of the Tax and Trade Bureau of the US Treasury. There's no romance in this:

What are the Federal requirements for "Custom Crush" clients and winemakers?

The custom crush client may be required to obtain a Federal Wholesaler's Basic Permit from TTB. This permit allows the client to engage in the business of purchasing wine for resale at wholesale, in accordance with the Federal Alcohol Administration Act at 27 U.S.C. 203(c)(1) and 27 CFR 1.22. Although the client is specifically paying for the producer's services, the client has purchased wine (within the broad meaning of the term) at the price set in the agreement. If the client engages in activities normally associated with wholesaling, such as setting the price for the wine, determining which dealers will be sold the wine, and controlling and paying for advertising of the product, the client must have a wholesaler's basic permit. If, however, the client merely receives the proceeds from the sale by the winery of the resulting wine, a permit would not be required. In addition to the basic permit requirement, the custom crush client who engages in the business of selling wine is liable for Special Occupational Tax as a wholesaler ($500/year) if the wine is offered for sale to other dealers, or as a retailer ($250/year) if the wine is only offered for sale to consumers.

Given all the regulations, it is a wonder anyone does any business at all. And to think that the wine business is not exactly new. It dates to the ancient world, and survived and thrived for many centuries without a Tax and Trade Bureau. These people are not necessary for the world of wine, and their only contribution to wine production is to harm producers and raise the price for consumers. So it is in every sector of economic life.

Recessions are a great time to appreciate anew the importance of economic logic to our lives, to celebrate the contribution of market production, and to seriously reevaluate the merit of big government that we permit to thwart the prospects for a speedy economic recovery.

 


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