The key to U.S. economic growth and job creation lies in our ability to innovate new products and services and deliver them to the world’s nearly 8 billion consumers. This requires tax policies that incentivize entrepreneurs to take risks and pro-globalization legislation that secures access to foreign markets.

Let me explain.

Reasonable tax rates and economic policies that allow entrepreneurs to keep more of their winnings is a primary driver in the creation of new companies, the hiring of new employees, and the innovation of new products. And just as importantly, secure access to the world’s nearly 8 billion consumers through free trade agreements gives our producers economies of scale much more so than just selling to America’s 333 million consumers.

These factors have been primarily responsible for our high standard of living and the great success of our free-market capitalist system. But globalization is like fire: it can cook your food, keep you warm, or burn your house down. It has tremendously benefitted the United States. But it has not impacted all of us equally.

We need to have a balanced perspective to ensure that we don’t overtax entrepreneurs and kill the goose that lays the golden eggs.

Globalization, which is evolving and not dying, has greatly benefitted higher-skilled workers engaged in life-long learning and companies that are highly productive or produce goods and services rich in intellectual property. However, it has presented new challenges for employees with limited skills and for less competitive firms.

This leads to another very important point. In addition to reasonable tax rates necessary to incentivize entrepreneurs to take risks, we also need to generate enough tax revenue to subsidize healthcare, education and other areas vital to rebuilding our middle class. Unfortunately, the American middle class has been eroding since the 1970s partly due to the fact that housing, healthcare, and education costs have risen faster than middle-class incomes. And recently, the middle class took a big hit do the onslaught of Covid-19.

In addition, the U.S. labor share of national income, the amount paid out in wages, salaries and benefits, has been declining since the 1980s, according to a McKinsey Global Institute report. This has contributed to income inequality that is now greater in the United States than in other advanced economies, notes the Pew Research Center.

The decline in union membership in the United States certainly plays a role. In 2021, union membership among private-sector workers was 6.1 percent, and among public-sector workers, 33.9 percent, according to the Bureau of Labor statistics. This is considerably lower than in 1950, when 1 out of 3 private-sector workers belonged to a trade union, says the Brookings Institute.

In The Spotlight

The perception that the current American economic system is not working for all Americans is reflected in a variety of surveys. For example, in a November 2019 Gallup poll, only half of 18 to 39 year-olds viewed capitalism positively, down from 66 percent in 2010. And from 2010 through 2019, young adults' overall opinion of capitalism had deteriorated to the point where socialism was tied in popularity. In December 2021, a Gallup survey indicated that only 60 percent of Americans of all ages held a favorable view of capitalism, while 38 percent held a favorable view of socialism.

If the middle class continues to erode and greater numbers of Americans feel the system is rigged or will not allow them to move up the economic ladder, they are increasingly likely to support populists: politicians who appeal to ordinary voters that feel their concerns are disregarded by the establishment. This textbook definition of a populist sounds attractive. However, in reality, populists often manipulate disillusioned voters by attributing inequality to various groups, including elites, immigrants, and foreigners in an attempt to gain influence and support. But that’s not all.

Based on history, populists on the far left have a tendency to implement socialist policies that disincentivize entrepreneurs to take risks and result in lower economic growth and declining standards of living. On the other hand, populists on the far right have a tendency to gift allies economic benefits ultimately resulting in an unsustainable system of crony capitalism. The increasing perception that the U.S. system no longer works along with greater support for populists is a combination likely to threaten our system of free-market capitalism.

The importance of a strong middle class is not a new concept. The Greek Philosopher, Aristotle, detailed why a strong middle class is so essential to a functioning democracy 2,400 years ago. He postulated that if the middle class disappears, democracy will disappear with it.

Overall, we need to have a balanced perspective to ensure that we don’t overtax entrepreneurs and kill the goose that lays the golden eggs. But on the other hand, we need to generate enough tax revenue to subsidize programs that will strengthen the middle class and in doing so, strengthen American capitalism.

A version of this article appeared in The Buffalo News.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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