A Review of Thomas Donlan's A World of Wealth

In his excellent new book, A World of Wealth, Barron’s editorial page editor Thomas Donlan writes that when “governments fight economic cycles, they usually make them worse.” Donlan’s words ring particularly true right now as we see our minders in the federal government seeking to shield us from all manner of economic pain largely caused by those self-appointed saviors.

To Donlan’s way of thinking, capitalism, rather than government intervention, is the cure for what ails us because when true capitalism is practiced, “if we don’t like the results, we can change them anytime, just by adding our money to the market.” In that sense and many others, Donlan’s book couldn’t be more timely. With government-driven capitalism-lite presently yielding all sorts of misery, he unblinkingly argues that “capitalism provides superior solutions to most of our looming problems.”

Sure enough, while Thomas Edison did not invent the light bulb, Donlan reminds us that Edison did create the first manufacturable bulb thanks to capital provided by J.P. Morgan and other Wall Street financiers. Lives were forever changed for the better thanks to the marriage of innovation with capital, and the light bulb itself serves as a simple example of how capital-driven profit is a source of good for all.

The above is particularly true when poverty in the U.S. is considered. In addressing America’s poor, Donlan asks, “Poor as compared to what?” His point there is clear in that while indoor toilets, electric light and phones were somewhat of a rarity one hundred years ago even among the rich, they “now are commonplace items in virtually every American home, even the poorest.”

Donlan’s answer for why the formerly unattainable is now taken for granted even among the poorest has to do with how we treat what Canadian economist Reuven Brenner refers to as our “vital few.” To Donlan it’s a simple 80/20 concept; as in “if the 20 percent who create wealth are left unfettered and lightly taxed, they and their investments will create more wealth, so the benefits will trickle down to the rest of society in the form of wages and profits.”

In our present climate, the rich are often targeted as the problem, but Donlan eagerly debunks such unfortunate and impoverishing thoughts. Indeed, it is thanks to the profit motives of the vital 20 that goods and services formerly out of reach are increasingly accessible to all. The rich most often become rich because they make or finance the creation of goods for those not rich.

So while the rich almost by definition make our lives easier every day, Donlan also shows that they increasingly foot the bill for a federal government (some, including this writer, would say this is unfortunate) that takes their gains and returns them to those whose incomes are relatively small. Think the two “stimulus” packages of this decade, plus as Donlan notes, “Today’s poor also have a better social safety net.”

The doings of the federal government are largely paid for by the top 1 percent of earners, who, according to Donlan account for 36 percent of all federal revenues. Donlan also shows that while “tax freedom day” falls on July 23rd for our biggest earners, the bottom 50 percent of wage earners in the U.S. account for 3.3 percent of all federal revenues, and their own freedom from taxation begins on January 29th!

When we consider how much the government is reliant on the wealthy to cover its massive spending, the tax cuts the nation has enjoyed in the last 25 years will hopefully be reassessed in terms of fairness. With the rich accounting for the vast majority of government revenues, commentary suggesting reductions only aid the rich doesn’t fly with Donlan. As he makes plain, “tax cuts benefit only taxpayers.” Taxpayers ARE the rich.

Donlan’s solution is not one whereby the poor would be taxed more, but instead he would like a system that’s blind to individual income because in his words, “it is unjust to tax a dollar of income differently depending on who earned it.” Happily, Donlan supports some form of a flat tax or sales tax that would make us all relatively equal in the eyes of the federal government. Tax simplification is a must because as Donlan so articulately points out, Congress “has labored for almost 100 years to produce a fair tax code, with impressively awful results.”

On the corporate-tax front, Donlan lists it as an “unwise burden” designed “to appeal to voters who think corporations are like people, only bigger and meaner.” To Donlan, repeal of the corporate tax makes basic economic sense in that the tax itself “ignores the creative power of capital.” We’d be better off if corporations were able to keep their profits, for reinvested profits powering the economy.

With the glorious wonders of free trade increasingly under attack, Donlan simplifies that which vexes some by reminding readers that free trade “is the power to ignore borders and boundaries on the road to wealth and progress.” To bolster his point, he challenges readers to imagine what the U.S. economy would resemble if the U.S. were “50 countries with 50 currencies and 50 protectionist legislatures.” Rather than prosperous, “it would look like Old Europe or Latin America.”

No immigrant basher, Donlan happily notes that “immigration is trade by other means.” Importantly, he adds that every wave of immigration has been met with hostility, which presumably explains all the anti-immigrant sentiment we’re witnessing today.

Donlan shows the folly of increased border control funding that has actually led to an increased “flow of illegals” who “decided to stay because crossing the border in either direction had become much riskier.” Donlan’s economic solution to the alleged problem of immigration would be to open the borders to those who have jobs while requiring new entrants to agree “to take no social services.”

On the subject of climate change, Donlan offers the basic, but frequently ignored truth that “Over the eons, Earth has been much colder and warmer than it is now, without human help or hindrance.” And assuming that what is presently a theory is in fact a problem, Donlan suggests that we should treat it from an economic perspective and “try to figure out our most efficient response.”

While disagreements with Donlan are few, he addresses high-priced oil as more of a function of supply vs. demand, as opposed to it largely being the result of a weak dollar. Donlan also says “The United States should have an energy policy aimed at providing Americans with the greatest amount of energy at the least economic and social cost.” It says here the U.S. needs no energy policy, but instead should offer the world a stable dollar that when last implemented, gave us cheap oil at a stable price.

Better yet, throughout the book Donlan talks up the undeniable good that comes from comparative advantage, or in his words, “Everything in capitalism insists that we produce at the lowest possible costs.” This surely applies to oil, in that with oil everywhere irrespective of origin for the buyer of same, we should gladly import our fuel from locales around the world that have easier and cheaper access to it. A stable dollar and free trade will solve the alleged oil conundrum, all the while allowing Americans to pursue higher value work.

Surely no Keynesian, Donlan suggests that heavy World War II spending did in fact deliver us from recession. More realistically, the Laffer Curve of the average American rose substantially given the stakes involved during the war, and Americans quite simply worked harder. He also writes that the early ‘80s recession whipped inflation, but when we consider that inflation frequently coincides with recession, we should say that the Reagan tax cuts and the administration’s strong dollar policy beat inflation; Paul Volcker’s monetarism-induced recession a sad economic chapter that could have been avoided had the goal simply been a stable unit of account.

In what is an essential book, Donlan concludes that, “Economic booms and busts always have their causes in wrongheaded policies imposed by central bankers and governments trying to control economic forces that are actually too strong for them.” Truer words have rarely been written, so here’s hoping Donlan’s book reaches a wide audience that includes our allegedly wise leaders in Washington who see every problem as something for government to fix.