The entrepreneur is under fire in America today.  Amidst a severely weakened economy, high jobless rate, and declining standard of living for most Americans, it's no wonder that successful entrepreneurs, particularly those that have amassed significant wealth, are not looked upon favorably these days.

I'm here to do the unpopular and defend them.

A successful free market, free enterprise system that yields the kind of prosperity this country once knew requires that all of the parts of the whole be allowed to exist in equilibrium with each other, such that they can interact naturally.  The entrepreneur is as important a cog in this mechanism as any other, and the importance of his role is being overlooked at best, marginalized and vilified at worst.

"Entrepreneurs create jobs."  I'm sure you've heard this cliché by now.  It's true, but it's a bit oversimplified.  Look at it this way: entrepreneurs take ideas into the marketplace and risk their capital (and sometimes other people's capital too) to make that idea come to fruition.  When they risk capital, that capital is injected into the marketplace, where it stirs the engine of commerce.  By this I mean that the entrepreneur’s application of capital creates demand where there was none (or less) to begin with.  Let's look at an example of what I mean by this:

Let’s say an entrepreneur decides she wants to start a website that promotes her freelance writing skills.  She has amassed a small amount of capital through her earnings in her previous job.  She then applies this capital to various vendors who she relies upon to get her business up and running: the company that sells her the domain name for her website; the company that hosts her domain on a secure server; the web design consultant who gains her as a client and helps her create a suitable web page.  Through the pursuit of her idea to create this freelance business, she has in turn created demand for other companies' services and products, thus raising their bottom line, and in an aggregate sense, potentially impacting their decision to eventually hire more people.

Now let's say she grows her business over the course of a couple of years, and adds two writers to her staff.  This constitutes the job creation aspect of her entrepreneurial effort.  Two jobs exist now that would not have existed had she kept the freelance idea to herself.

Let's say ten years later, she operates a multi-million dollar writing service firm, and takes home over a $1 million a year in pay.  Through extremely hard work, quite a bit of lost sleep, her own personal funds, and the intangible cost of bearing the weight of risking everything she previously knew (her job) to pursue an unknown (her business), she has managed to create a comfortable lifestyle for herself.

While much of her incentive to do all of this was derived from her desire for autonomy and freedom from an employer, the financial rewards played a part in her decision as well.  She knew that as she amassed wealth, there would be mechanisms in place to protect that wealth and help her to grow it and allow her to use it as she sees fit: to pass on to future generations in her family, expand the writing business, or perhaps start new and different kinds of businesses.  In many respects, the growth and protection of her wealth could potentially translate into even greater benefits for society as a whole.

Unfortunately, in today's society, there is a sense that individuals like those in the example above simply "owe more" than they currently pay.  Since their lifestyle is perceived as "comfortable" or even “luxurious,” it's become a given that they can afford to pay more than they already do.  The individual's fundamental right to his or her property -- a core tenet in a free society -- is overlooked and never even introduced into the debate these days.

If you've been following the Republican Presidential primary race, you've probably heard by now that Mitt Romney has released his tax returns, revealing income of over $20 million per year the last couple of years, and an effective tax rate of 14%.  Many are outraged that he pays such a low tax rate.

I'm thrilled, because it means if he can reach that point, then the same reward awaits me if I can duplicate a measure of his success.

Here's another way to look at it: for every Mitt Romney who creates wealth through hard work and dedication, there are numerous others who have tried and failed.  They risked everything, and lost everything.  But they did so because a significant reward lay ahead for them if they succeeded.  Yes, there were lots of incentives that drove them to try, but certainly we cannot discount the financial reward as one of those driving forces.

Here some will argue that these individuals would still take these risks even if they didn’t pay the 14% tax rate, but instead paid some higher amount, such as the current top tax rate (35%).  I counter that by saying, how do we know that for certain?  How do we know some of the individuals, who may have possessed great ideas for a business or product, didn't like the fact that their hard work and risk-taking would be met by higher taxes, and passed at the idea of starting that business?  How many disliked the notion that if they amassed an especially large fortune, their ability to pass it on to their family or into new businesses would be significantly impacted?  How many were discouraged by the general sentiment surrounding successful entrepreneurs, who are often made to be the scapegoat or villain, especially in hard economic times like today?

Or look at it pragmatically.  If I’m taxed at a much higher rate, that leaves less capital with which I can risk for more business development and job creation. I’d simply have less resources on hand to try and grow my wealth any further than I already had.  Why would we want to hamstring business development and initiative?  Don’t we want to encourage it as much as possible?

Ayn Rand wrote brilliantly about these questions in her book "Atlas Shrugged," which depicts a society where, after made the scapegoat for America’s economic distress, all of the competent businesspeople and entrepreneurs simply disappeared in protest, leaving the society's economy to stagnate and collapse.  Fed up with being seen as the cause of the problem rather than the remedy, they simply dropped out of society.  While it's an extreme rendering of what's possible, the general theme is what's important, and we can see the same conditions for this developing here in America today.

There is one caveat that's worth mentioning.  What I've written above does not apply when the access a given individual has to the basic requirements for starting a business is prohibitive, or does not equally apply to all people.  In other words, the barrier to entry for starting a business should be as nonexistent as possible to encourage as many people as we can to try it.  Thus, things like the administrative filings required for a business should be streamlined and inexpensive, widening the access to as many people as possible.  (With the advent of the Internet and a slew of low-cost and even free resources, starting a business has probably never been easier, from a pragmatic standpoint.  Unfortunately, from a regulatory standpoint, the opposite is probably true, but that's a discussion for another blog post.)

I submit that if we truly desire a return to prosperity, a return to better economic times and viability within the world, we must once again embrace the entrepreneur as an equally important role within the free market system.  Encouraging such individuals to pursue their ideas and grow those ideas here within our borders would be the best stimulus we could generate for the economy.  Let's hope we give this a try as soon as possible, before it's too late.

As our economy continues to struggle, with both parties in our political structure pointing the finger back and forth, I thought it might be helpful to dredge up an old article I wrote back during the 2008 Presidential campaign season (located on my previous blog, "Austrian School"), titled "Your Presidential Candidate Doesn't Matter (Subtitle: You'll Be Worse off Economically in 2016 No Matter Who Gets Elected)."

Now, I hate to jump the gun by five years, but I'm starting to feel like I was more right than I even imagined in the first place.  I suspect that if you had read this article of mine when it was first published, at the very least you were a bit skeptical...but now here we are, worse off than we were then, and all signs pointing downward.

While I encourage you to read the whole article, I did want to share and comment on a couple of excerpts here.  To begin:

To quickly summarize: when inflationary policies are instituted, and money is created out of nothing, that money flows to entities that can utilize it before its price-raising effects seep into the larger economy. These entities (investment banks, corporations, the wealthy) can invest it or capitalize it in a fashion that is advantageous to them, such as by investing in real estate, stocks, derivative investments (options, collateralized debt obligations), or anything else for that matter. Then when the added money trickles down to the consumer (read: you and I), we are left with one thing: higher prices. Less purchasing power. Smaller paychecks. Whatever you want to call it, it's not good.

I like this paragraph because it captures, in essence, this prescription we've received of more government borrowing/money printing/spending (through Quantitative Easing I [February 2009], Quantitative Easing II [November 2010], and Operation Twist [September 2011]), which so many of us take for the beginnings of an economic recovery.  Unfortunately, it is actually the poison that will eventually do us in.  It LOOKS good -- "Great! The government is actually doing something, they're helping us out."  It SOUNDS good -- "This government spending will create more construction/infrastructure/etc jobs."  It FEELS good -- "We've GOT to do something, we can't just do nothing."

But it is NOT good, and it will turn out very badly as time goes by.  Briefly said, it will ultimately achieve only the following:

1) Add to the national debt, burdening us with increasing interest payments over time in order to service that debt.
2) Contribute to devaluation of the currency, weakening the value of each dollar, lowering our purchasing power, and leading to a lower standard of living.
3) Crowd out more jobs than it creates; for every job created by the government, the fact that it had to borrow/spend to create it destroys 1+X jobs (we'll never know what the X is).

I also wanted to highlight this excerpt, the closing paragraph of the August 2008 article:

Allow me to proclaim with even more emphasis the following: no matter who becomes President - Barack Obama or John McCain - your economic situation will be worse after the presumptive two terms that individual will serve. By worse, I mean some combination of the following conditions: less home equity, devalued investments in stocks and bonds, lower purchasing power, less available savings, more reliance on credit to buy the essentials, you name it. It won't be pleasant.

Gloom and doom.  Yeah, I know everyone is tired of it, but it's way past the time to face facts.  The government does not have a shred of a clue how to fix the economy, aside from their misguided appropriation of our wealth and the subsequent redistribution of it.  And we see where that has gotten us today.

Actually, it's got to be somewhat unnerving for those who have put so much faith in the government's ability to aid an economic recovery, to see the ineffectiveness of these policies.  I honestly don't know how anyone could actually believe at this point that the government has a viable approach for fixing the problem.  Every policy has failed, and indeed has worsened the conditions under which we're subjected to economically (rising inflation, higher national debt, etc.).

I hate to say it, but at this point in looking ahead to the 2012 election, it really matters not who ends up President.  There is no political will nor ability to compromise on the big issues and problems to suggest that the economy will once again prosper and thrive.  The election season and campaigns will roll on with theatrical flourish, and you and I will continue to witness a declining standard of living.

Followers of this website know that along with Nassim Taleb, Peter Schiff is the other market and investing guru that I follow closely and have a deep respect for -- and so you wouldn’t be too surprised how happy I was to hear that he was given an opportunity to testify before Congress on the current economic conditions.  The testimony occurred back on September 13, and you can watch part 1 and part 2 of his testimony on YouTube.

Basically, Schiff sticks right to the same message that he’s been touting for years, and that he used as a platform for his unsuccessful Senate run in 2010.  The major points you’ll hear in the testimony:

-- The government is a net destroyer of jobs.  For every job we see created in the tangible sense, we have no way of estimating how many jobs were destroyed or stopped from being created due to the burden of higher government spending, debt, taxes, regulation and overall intrusion into the economy.

-- Stimulating the economy with more borrowed or printed money does not make for an economic recovery; rather, it lays the foundation for greater economic pain down the road, by acting as a “sedative” that delays the necessary corrective forces in the market, thus exacerbating them when they finally run their course.

-- Speaking as a businessman (Schiff owns and runs Euro Pacific Capital), he emphasizes the fact that he has been discouraged from hiring new workers due to the high-tax, high-regulation environment our economy is subjected to.  Schiff goes so far as to point out that he has now resorted to opening new offices/branches overseas (he mentions Singapore and the Caribbean) in order to escape the tax and regulatory burden here in the States.  Effectively, these are jobs the government has driven out of the country through various misguided laws and policies.

Of course, these are just a few high points from the testimony.  If you enjoy following Schiff, or want to hear an alternative argument as to how to truly stimulate the economy as opposed to the ones consistently put forth by the government, then I recommend you take a look at the video clips contained in this post.

I don't understand why Germany (the most vocal), or any other EU members for that matter, are upset about the impending second bailout of Greece.

They asked for it.

They should be celebrating this collective spirit, this rush to the aid of their neighbor.  This is what socialism is fundamentally based upon.  This is a defining moment for socialism, one which we should expect an economic collective like the EU to embrace.  This is the system at work, doing what it was always designed to do.

So why aren't they celebrating this defining moment?

The answer is simple: everyone likes socialism, until it's their money that's taken away and redistributed.

Don't the EU countries trumpet their healthcare systems as some of the best around?  Free access for everyone, no strings attached.  Early retirements, big pensions, shorter workdays...it's a veritable paradise.

Until you have to loan a few billion euros to your struggling neighbor.  I don't understand the 180 degree switch in attitude.

To clarify a little, the EU is not a socialist collective per se.  But in relative terms, it’s embraced certain aspects of socialism to a greater extent than the US, for example.  EU nations have banded together for purposes of economic solidarity, and in the process forfeited a degree of national sovereignty.  Individual nations no longer have the right to decide on economic matters, according to the interests of their citizens alone.  It is this collective, we’re-in-this-together approach to economics that I’m focusing on in this article.

I'll always be the first to tell anyone in a debate about economic systems that capitalism is not a good one either -- it's just the best one we're going to get.  I believe the basic reason behind that is as follows:

Economic freedom begets personal freedom.  Socialism does not beget economic freedom, therefore socialism does not beget personal freedom.  Socialism and personal freedom are not compatible.  That incompatibility runs contrary to the principles our country was founded upon.

If we value personal liberty above all else, then the economic system that best supports that liberty is capitalism.  At the same time, we're dealing with human beings, so we have to deal with human nature, and the desire to enrich ourselves at the expense of others can sometimes be overwhelming.  Since we can never remove that impulse from people, we can never perfect capitalism.

The fact that we've never perfected it doesn't mean we should do away with it, or embrace a system like the EU.  We shouldn't do away with it, that is, unless we no longer value personal freedom.  When I say things like "personal freedom" and "economic freedom" I'm referring to the fact that in a capitalist system, the opportunity to work, prosper, thrive, take risks as an entrepreneur and benefit accordingly if success is achieved, is accessible and available to all.  In turn, these economic freedoms go hand-in-hand with personal freedoms.  Think of it in the inverse: if someone told you how much of your money you’d earned you could actually keep, and how that money should be spent, and what kinds of private property (if any) you could call your own, how free would you describe yourself?

Of course, when capitalism is distorted by the intrusion of top-down, human-based decisions and influences (such as from government officials), the opportunities normally commensurate with capitalism also become distorted.  I believe this has happened in our country, but I also believe the system is salvageable.  It’s salvageable because we’ve yet to implement it to the best extent possible.  Shrinking our government’s role in the economy, eliminating our central bank, lowering taxes, and encouraging entrepreneurship and innovation by fostering a business-friendly environment would be a good start towards doing so.

The Greece situation provides America with a window to the down side of a socialist approach to economics.  We are witnessing the sacrifices that ordinary citizens, in EU countries besides Greece, are being forced to make by their governments, bound to the notion that their economic fate is directly intertwined with Greece’s fate, mandating that the painful burden must be shared by all.  Is this the kind of philosophy we want dictating our economic future?

The US housing market is generally regarded as the proverbial stack of dynamite waiting to further blow up an already troubled economy.  Examining the details behind why that's the case is always eye-opening, and today's article from Barron's magazine titled “The Next Mortgage Bombshell” (appearing on Yahoo Finance) was difficult to stomach.  Reading this kind of material makes one wonder how the inevitable will ultimately affect our economy and the markets.  The bottom line conclusion is, it can't and won’t be good, no matter how you slice it.

Before I get into specifics about the article and some of the more harrowing data points it exposes, it's important to step back a moment and put the housing market troubles in context.  Since the first wave of mortgage meltdowns subsided in 2009, the economy appeared to steady itself for a while, as the stock market soared beginning in March 2009 and only recently began to stumble.  After this 2-year relative period of calm, the overall macroeconomic outlook once again appears bleak, with gloomy data rolling in on everything from manufacturing, to unemployment, to growing inflation.

Eerily, this is all occurring without any significant spike in the mortgage mess.  (Admittedly, moribund home sales figures and new housing starts have probably contributed to the overall economic malaise.)  The fact that the economy has begun sputtering again, without the next major meltdown in housing even occurring yet, bodes very badly for what lies ahead.  The next wave of foreclosures and mortgage defaults has sweeping implications, on everything from bank sector strength, to consumer spending (people will retrench and ratchet up savings as their home equity dwindles), retail sales (people will be buying less), and unemployment (numerous industries are tied to the housing industry and will lay off workers).

“The Next Mortgage Bombshell” focuses on the three major private mortgage insurance (PMI)  companies -- MGIC Investment, Radian Group, and PMI Group -- and the challenges they face as mortgage defaults continue to mount.  Private mortgage insurance allows individual homebuyers to purchase homes without the traditional 20% down payment.  The insurer covers the first 25% of the loan as well as interest accrued.  MGIC, Radian, and PMI Group are all beginning to reveal signs of being unprepared for the growing number of foreclosures, and need for external relief in the form of government aid (read: taxpayer bailout) is all but guaranteed.  

All that said, consider these stark realities as discussed in the Barron's article:

-- All three PMI companies’ stocks were valued at $50 or above in 2007; all of them now trade under $7 a share.  This drop represents a serious loss of shareholder equity.

-- Triad, a fourth PMI insurer, is currently paying only 60 cents on the dollar for its claims, deferring the other 40 cents to IOUs.  Clearly, the company underestimated the required reserves for covering its claims, and it’s doubtful they’re the only ones who guessed too low.

-- In Radian’s portfolio, 52% of its loans are past due for at least the last 12 months, as compared to the usual 10-20% in prior years.  (The other two companies are nearly as worse off.)  The longer the past due period, the closer the loan is to foreclosure.

-- MGIC, Radian and PMI Group have established reserves totaling 51%, 44% and 43% respectively of the expected loss claims coming their way.  To say they’re unprepared for the onslaught of defaults would be an understatement.

All of this underscores the ridiculously high premium that was and continues to be placed on homeownership in America.  The “American dream” misnomer/fantasy -- encouraged and manufactured by the housing industry, banking sector and the government -- has warped into the “American nightmare” for millions of homeowners who were simply unprepared for the financial shock of a precipitous drop in home value and loss of equity.  The concept of homeownership needs to once again embrace basic financial principles, such as the 20% down payment and mortgage payments of 25% or less of household budget.  Unfortunately, as our standard of living declines, fewer and fewer Americans will be able to afford these kinds of figures -- until home prices fall to levels that are once again affordable and aligned with personal incomes.  This process, whereby the market will reshape home prices and dictate new supply and demand characteristics, is a painful yet necessary reality we must now face.  We are at the beginning of that process now, with a long way to go.

A few weeks ago, it came to light that General Electric, one of the corporate giants in the US, paid no taxes for the year 2010, and in fact received a $3.2 billion tax benefit.

Congratulations GE.  I couldn’t be happier for you.

I really mean that.  I’m not saying it for effect.  The furor that arose over this issue -- though seems to have died down already, a mere three weeks later -- has at least briefly shone another unflattering light on the labyrinthine, nonsensical, so-damn-confusing-it’s-almost-criminal tax code that strikes fear in the hearts of individual taxpayers and keeps droves of corporate tax lawyers employed forever.

GE followed the law.  They worked within the confines of the law and found a way to eliminate any tax obligation while benefitting the company and its shareholders.

The problem is the anger over this issue is channeled in the exact wrong direction.  The Congress is responsible for the law.  The Congress wrote the tax laws.  The Congress is responsible for our tax code.

The Congress is responsible for GE not paying any taxes.  It’s the Congress’ fault.

All of the other storylines here are basically immaterial.  Much was made of the fact that GE’s CEO, Jeffrey Immelt, is an advisor to the President on jobs issues.  So what?  He doesn’t advise him on tax issues.  

I also read that the fact that Immelt advises the President on jobs issues, while GE laid off over 20,000 American workers, was called into question.  Another red herring.  Nothing to do with the broken tax code.  

These issues and others: mere distractions from the core issue of a vampiric tax code that needs to be simplified.

Quite frankly, I think the fact that GE didn’t have to pay any taxes and instead got money back might actually incentivize them to reinvest in the company, expand, and possibly hire more Americans into new jobs.  Is that guaranteed to occur?  No, but that’s the nature of private enterprise -- GE can decide the best way to grow its business and create value for its shareholders.  We should be glad when companies get the opportunity to create more wealth and employment, rather than forking their profits over to an ever-expanding government that will simply squander the money. 

The bottom line is, if the problem is that we want our corporations to pay more taxes and avoid the kinds of loopholes that result in $0 corporate tax bills, then we need to implore the Congress to rewrite the tax code and make it simple, straightforward, and evenly applied across the board.  Until the Congress does that, it’s not serious about collecting taxes from the likes of GE.