John A. Allison
One of the underlying causes of the Great Recession and its abnormally slow recovery is a failure of leadership. We have a leadership crisis at the individual, organizational and societal level that has exacerbated our economic problems and handicapped the fundamental motivating principle at the heart of our country, the pursuit of happiness.
In my new book, “The Leadership Crisis and the Free Market Cure,” I lay out what it takes to be an effective leader. Leaders must live and communicate the fundamental values that are necessary for human flourishing. They must create the processes that incentivize superior performance and design a purposeful, rational mission to meet objective goals. This requires education, feedback and the honing of behaviors that produce excellent results.
During my almost 20-year tenure as CEO of BB&T, the company grew from $4.5 billion to $152 billion in assets. In our leadership development program, we educated employees by requiring them to read “Atlas Shrugged, Economics in One Lesson,” and other books on the principles that underlie a free society and free markets.
“Individual, organizational, and societal success are all based on the same principles that are derived from the laws of nature and human beings’ fundamental nature.”
Drawing lessons from these principles was critical to the success of the company. For example, we decentralized the decision-making structure in a way that enabled BB&T to weather the financial crisis without a single quarterly loss. This was in stark contrast to the example of some other financial institutions that centralized and focused on ill-gotten short-term gains in a toxic regulatory environment plagued by excessive meddling by the government and the Federal Reserve.
Excessive government interference distorts the economy
The crux of America’s economic problems lies in this irrational system of excessive government interference that distorts the proper functioning of the economy. Most of the goals that are described by political leaders are based on an assumption that the country is one monolithic whole. In reality, a country is millions of individuals with wildly varying goals that are too complex for central planners to account for.
Unfortunately, the flawed fundamentals that led to the terrible financial crisis in 2008-2009 are still around and have been amplified since the crash. Recent presidential leadership has discouraged businesses and entrepreneurs to invest for the future. More regulations, higher taxes, government-chosen winners and losers — these are not the ingredients of a healthy economy and they indicate a dangerous lack of leadership.
What politicians and business leaders need to understand is that the same fundamental concepts that are appropriate for individual behavior are also appropriate for organizations and for society and government.
Economy is essentially a collection of individuals
Boiled down to its essentials, the economy is simply a collection of individuals. A leader will recognize this and create an environment wherein honest feedback is encouraged. Many leaders fail because they do not receive meaningful feedback. Sometimes this is a personality issue in that they intimidate their team members, who are therefore hesitant to express the truth. Sometimes leaders only seek feedback from those who are most likely to agree with them.
When I was CEO, BB&T operated with 33 community banks. I would visit each of these banks in a systematic fashion and listen to employee concerns. The feedback from a single employee was not always that meaningful. However, if there was recurring theme from a number of high-performing team members, there must be an issue that requires action.
There are some significant societal leadership implications of this issue. You would not want to vote for a president who was not able to get feedback from those who disagree with him. Presidents with a penchant for executive action, disregarding the Constitution’s checks and balances or ignoring criticism from those in a position to have special knowledge of an issue, exemplify poor leadership.
Creating win-win partnerships
Another important lesson from the market is the value of creating win-win partnerships. In the more than 100 mergers we executed at BB&T during my tenure, we approached them in this mindset and practically all of them were successful. It’s not enough to outsmart or mislead in any way a future partner. If they are not objectively energized by the potential of the partnership, then it will be better for both parties to part ways.
For partnerships to work, they must be based on voluntary agreements. They cannot be forced. Government, by contrast, is all about force. And that’s why, in the long term, government-forced partnerships will not work. If we want optimal outcomes in terms of economic growth, government should be limited to preventing the initiation of force by private individuals, and not much else.
I am often asked by students whether my intention when I joined BB&T was to become CEO and make a lot of money. I liked being CEO and enjoyed earning a lot of money, but neither of those things was an objective. My goal was always to do whatever I did better than it had ever been done before and to understand how what I did related to the rest of the organization.
Individual, organizational, and societal success are all based on the same principles that are derived from the laws of nature and human beings’ fundamental nature. Purposeful, ethical individuals are the foundation for human flourishing. “Life, Liberty, and the Pursuit of Happiness” is one of the most profound insights in human history. We must put those leadership principles back into use if we are to flourish in the future.John Allison is the president and CEO of the Cato Institute.
There was not much jubilation at the events commemorating 25 years since the fall of communism in Central and Eastern Europe. During his speech at an official gathering of Central European heads of states in Prague, the President of the Czech Republic, Milos Zeman, was booed by the crowd and pelted with eggs and tomatoes.
In neighbouring Slovakia, meanwhile, the anniversary of Czechoslovakia’s Velvet Revolution was marked by the surprising resignation of Pavol Paska, the speaker of parliament, following a scandal over corrupt public procurement of medical equipment, implicating him and his family. On Monday, a crowd of some five thousand people gathered in Bratislava to protest against rampant corruption and the growing ties between big business and government. On the same day, over 10 thousand Hungarians protested in Central Budapest against corruption, at an event dubbed ‘Public Outrage Day’.
There can be no question about the enormous economic, social, and human progress that countries of the region have made since 1989. However, there is a gap between the exuberance epitomized by the recent Foreign Affairs article by Harvard economist Andrei Shleifer and UCLA political scientist Daniel Treisman, who write about what they see as “normal countries,” and the growing dissatisfaction of many of the citizens of these countries, illustrated by this weeks protests — as well as by the growth of fringe, anti-system, populists of different ideological stripes.
“The widely shared feeling of dissatisfaction in the heart of Europe cannot be dismissed simply as a product of people’s unrealistic expectations of the change that the fall of communism would create.”
Among the successful countries of Central Europe, this backsliding has been the most pronounced in Hungary. Its Prime Minister, Viktor Orban, cited Turkey and Russia as examples of illiberal democracies that worth following and emulating. Though disturbing, Mr Orban’s rhetoric pales in comparison with his actual policies, which have aimed consistently at suppressing the civil society and extending the power of the state.
Corruption is a problem, both for Hungary and its neighbours. On most indicators of institutional quality and corruption, a significant gap persists between post-communist countries and the more successful European economies- and it might even be widening. Slovakia, for example, ranked 57th on the 2004 edition of Transparency International’s Corruption Perception Index. By 2013, it moved down to 61st place. The Czech Republic, in turn, fell from 51st to 57th place.
This goes hand in hand with the growing political power of the wealthy. In Slovakia, the investment group Penta, known for its presence in health care sectors in Slovakia, Czech Republic, and Poland, created an uproar for acquiring a share of the country’s leading newspaper, SME. The purchase triggered the resignation of most of the editorial staff over fears that the acquisition would end the outlet’s long tradition of investigative journalism, independent of political pressures.
This event had a precedent in the neighbouring Czech Republic when entrepreneur Andrej Babis bought, in the summer 2013, the publishing house MAFRA, which runs the country’s leading broadsheet newspapers, Lidove Noviny and Mlada Fronta Dnes. Shortly thereafter, Mr Babis — the second wealthiest Czech according to the Forbes ranking — entered politics and became the country’s finance minister. Mr Babis’ holding company, the Agrofert Group, comprises more than 200 firms, active in chemistry industry, agriculture, food processing, renewable energy, forestry, timber harvesting and woodworking. Agrofert is the largest Czech and Slovak agriculture and food group and the largest private employer in the Czech Republic, with some 27,000 employees.
Only last month, Petr Kellner, who ranks as the wealthiest Czech on the Forbes ranking, offered to fly the Czech President Milos Zeman from a state visit to China on his private jet. Notwithstanding the awkwardness of the situation and the eyebrows this was going to make, Mr Zeman was happy to oblige.
The Central European malaise also has a geopolitical component. Unlike leaders in Poland or in the Baltic countries, politicians in Slovakia, Hungary, and the Czech Republic have adopted a much more accommodative attitude towards Russia. The Prime Minister of Slovakia, Robert Fico, counts among the most vocal critics of EU’s sanctions against the regime in the Kremlin. Mr Zeman is a regular at conferences organised on the island of Rhodos by Vladimir Yakunin, the chairman of Russia’s State Railways. And Mr Orban’s government in Hungary recently struck a deal with Gazprom over the construction of a new natural gas pipeline, South Stream, disregarding thus the EU’s official position on the project.
The widely shared feeling of dissatisfaction in the heart of Europe cannot be dismissed simply as a product of people’s unrealistic expectations of the change that the fall of communism would create. It is also a reflection of some real backsliding in countries that were once seen as unequivocal reform successes. This year’s protests might mark a turning point, ending the period of voters’ tacit tolerance of corruption, cronyism, and government arrogance as necessary, if unpleasant, features of life after communism.Dalibor Rohac is a Policy analyst at the Center for Global Liberty and Prosperity, Cato Institute
John H. Cochrane
Progressives decry inequality as the world’s most pressing economic problem. In its name, they urge much greater income and wealth taxation, especially of the reviled top 1% of earners, along with more government spending and controls—higher minimum wages, “living” wages, comparable worth directives, CEO pay caps, etc.
Inequality may be a symptom of economic problems. But why is inequality itself an economic problem? If some get rich and others get richer, who cares? If we all become poor equally, is that not a problem? Why not fix policies and problems that make it harder to earn more?
Yes, the reported taxable income and wealth earned by the top 1% may have grown faster than for the rest. This could be good inequality—entrepreneurs start companies, develop new products and services, and get rich from a tiny fraction of the social benefit. Or it could be bad inequality—crony capitalists who get rich by exploiting favors from government. Most U.S. billionaires are entrepreneurs from modest backgrounds, operating in competitive new industries, suggesting the former.
“Confiscating wealth is ultimately about political power.”
But there are many other kinds and sources of inequality. The returns to skill have increased. People who can use or program computers, do math or run organizations have enjoyed relative wage increases. But why don’t others observe these returns, get skills and compete away the skill premium? A big reason: awful public schools dominated by teachers unions, which leave kids unprepared even to enter college. Limits on high-skill immigration also raise the skill premium.
Americans stuck in a cycle of terrible early-child experiences, substance abuse, broken families, unemployment and criminality represent a different source of inequality. Their problems have proven immune to floods of government money. And government programs and drug laws are arguably part of the problem.
These problems, and many like them, have nothing to do with a rise in top 1% incomes and wealth.
Recognizing, I think, this logic, inequality warriors go on to argue that inequality is a problem because it causes other social or economic ills. A recent Standard & Poor’s report sums up some of these assertions: “As income inequality increased before the [2008 financial] crisis, less affluent households took on more and more debt to keep up—or, in this case, catch up—with the Joneses. ” In a 2011 Vanity Fair article, Columbia University economist Joe Stiglitz wrote that inequality causes a “lifestyle effect … people outside the top 1 percent increasingly live beyond their means.’’ He called it “trickle-down behaviorism.”
I see. A fry cook in Fresno hears that more hedge-fund managers are flying in private jets. So he buys a pickup he can’t afford. They are saying that we must tax away wealth to encourage thrift in the lower classes.
Here’s another claim: Inequality is a problem because rich people save too much. So, by transferring money from rich to poor, we can increase overall consumption and escape “secular stagnation.”
I see. Now we need to forcibly transfer wealth to solve our deep problem of national thriftiness.
You can see in these examples that the arguments are made up to justify a pre-existing answer. If these were really the problems to be solved, each has much more natural solutions.
Is eliminating the rich, to eliminate envy of their lifestyle, really the best way to stimulate savings? Might not, say, fixing the large taxation of savings in means-tested social programs make some sense? If lifestyle envy really is the mechanism, would it not be more effective to ban “Keeping Up With the Kardashians”?
If we redistribute because lack of Keynesian “spending” causes “secular stagnation”—a big if—then we should transfer money from all the thrifty, even poor, to all the big spenders, especially the McMansion owners with new Teslas and maxed-out credit cards. Is that an offensive policy? Yes. Well, maybe this wasn’t about “spending” after all.
There is a lot of fashionable talk about “redistribution” that’s not really the agenda. Even sky-high income and wealth taxes would not raise much revenue for very long, and any revenue is likely to fund government programs, not checks to the needy. Most inequality warriors, including President Obama, forthrightly advocate taxation to level incomes in the name of “fairness,” even if those taxes raise little or no revenue.
When you get past this kind of balderdash, most inequality warriors get down to the real problem they see: money and politics. They think money is corrupting politics, and they want to take away the money to purify the politics. As Berkeley economist Emmanuel Saez wrote for his 2013 Arrow lecture at Stanford University: “top income shares matter” because the “surge in top incomes gives top earners more ability to influence [the] political process.”
A critique of rent-seeking and political cronyism is well taken, and echoes from the left to libertarians. But if abuse of government power is the problem, increasing government power is a most unlikely solution.
If we increase the top federal income-tax rate to 90%, will that not just dramatically increase the demand for lawyers, lobbyists, loopholes, connections, favors and special deals? Inequality warriors think not. Mr. Stiglitz, for example, writes that “wealth is a main determinant of power.” If the state grabs the wealth, even if fairly earned, then the state can benevolently exercise its power on behalf of the common person.
No. Cronyism results when power determines wealth. Government power inevitably invites the trade of regulatory favors for political support. We limit rent-seeking by limiting the government’s ability to hand out goodies.
So when all is said and done, the inequality warriors want the government to confiscate wealth and control incomes so that wealthy individuals cannot influence politics in directions they don’t like. Koch brothers, no. Public-employee unions, yes. This goal, at least, makes perfect logical sense. And it is truly scary.
Prosperity should be our goal. And the secrets of prosperity are simple and old-fashioned: property rights, rule of law, economic and political freedom. A limited government providing competent institutions. Confiscatory taxation and extensive government control of incomes are not on the list.John H. Cochrane is a professor of finance at the University of Chicago Booth School of Business, a senior fellow at the Hoover Institution, and an adjunct scholar at the Cato Institute.