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National Laws, Global Markets

Taxes and regulations harm, not help, the economy.

by James Leroy Wilson
September 17, 2008

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National Laws, Global Markets

As I write on September 17, 2008, gold it is selling at over $887 per ounce. Gold is valuable because is has many uses, and it is scarce. Now let's say that a literal mountain of gold was discovered in a previously-unexplored part of Siberia. Another in Australia. Another in the Congo. And yet another in Brazil.

Would not the price of gold in the U.S. plummet?

The mere knowledge that the Earth's supply of gold was much greater than previously thought, would lead to this result. The law of supply and demand is international.

But these discoveries would ruin American gold investors who were counting on an ever-higher price.

Would it make sense to protect these investors, by passing a law keeping the price of gold at $887/ounce?

That would be ridiculous. The investors would still be ruined, because there would be no buyers for their gold. No buyers mean no profits. Their gold would be like dead inventory.

But what of gold for industry and jewelry?

American manufacturers who had been using gold no longer would, because they wouldn't be able to compete with foreign producers who would be able to make gold products at far lower cost. Congress could conceivably try to "create" a domestic market by banning the importation of foreign gold, including foreign products made of gold. But just because the government tries to artificially inflate the value of gold, doesn't mean the public won't know its real value. They would know that the gold is overpriced and won't buy it, in the same manner that they wouldn't buy gum if the government mandated a price of $10 per pack.

It's an inconvenient truth: laws may be national, but the market is global. And no national law can overturn the economic law of supply and demand.

That's not to say that the price of a banana will be the same in Siberia as in Costa Rica. But it does suggest that Siberians are better off paying for shipments of bananas from Costa Rica, than they are trying to grow their own. Just as it would be to the U.S. government's advantage, in our hypothetical scenario above, to allow the new, low global price of gold than attempt to insulate the country from it.

In one sense, politicians of both parties seem to agree with this. That's why they've adopted the rhetoric of "free trade" when it suits them. But in other ways, they don't understand the global market at all.

Politicians claim they want to protect workers from exploitation, consumers from danger, and middle-class investors from fraud. And they want America to continue to have the world's highest corporate tax rates. In the past couple of days, both Barack Obama and John McCain have called for greater regulation of Wall Street.

But workplace, accounting, and tax code regulations impose compliance costs. Companies have to hire lawyers and accountants to sort them all out. These costs are added to the price the consumer ultimately has to pay. Likewise, the income taxes corporations pay are built into the cost of the product that consumers pay.

Is it surprising, then, that foreign imported goods, which may have to pass inspection but are otherwise exempt from these regulations and taxes, have lower prices? Is it surprising that corporations will leave one country for another with a friendlier regulatory environment? Will not more regulations only make it more difficult for American companies to produce quality, low-cost goods for the domestic and global markets?

The root cause of our economic woes is the inflationary effect of the Federal Reserve financing the federal government's budget deficits. In doing so, the Fed poured increasingly worthless dollars into various markets, leading to speculative booms and busts. The solution is not to increase the deficit still further with government bail-outs of failing firms, but rather to initiate monetary reform by allowing a free market in money, balance the budget, and let bankrupt firms to go under.

This will be painful at first. But it can be mitigated if, combined with these measures, America adopted a business-friendly environment. If the U.S. just abolished corporate income taxes, corporations would flock here (and investors would still pay income taxes on their profits). The threat of lawsuits would encourage companies to keep workplaces and products safe, without forcing business to comply with nonsensical or irrelevent regulations. There are already criminal penalties for fraud. Indeed, fewer regulations would mean less paperwork, which would ironically create more transparency because there is less fine print to sift through. And lower compliance costs will mean lower prices for American-made goods, allowing the American people to "buy American" once again while we become more competitive in foreign markets.

In a global market, businesses will be drawn to the most favorable locations. The United States is still the wealthiest market; if we changed our laws to once again became the "land of opportunity" that we used to be, we would no longer have to worry about inflation and high unemployment. 

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