When I crossed through Check Point Charlie from West to East Berlin more than two decades ago, countless East Germans told me of their dreams of moving to America. After numerous speaking engagements in Mexico in the 1990s, I found many in the audience either had an American passport or badly wanted one. And on more recent trips to Asia, Chinese students always tell me of their hopes to study and live in the United States. What is it about America that is so appealing? Can it continue?

Some economic and political systems are better than others. Although the fall of the Berlin Wall marked the end of communism in the former Soviet Union, that system began collapsing under its own weight many years prior to this historic event. As the saying went: people pretended to work and the government pretended to pay them. It's no surprise that the level of productivity and accountability was abysmal. With few incentives to produce, output was poor; quality was worse.

As the communist system was disintegrating, I met with several executives in Soviet-dominated Poland. Interestingly, not one could tell me what it cost to manufacture their goods. What they did tell me was startling: when supplies were delivered, people worked; when supplies ran out, they went home. It's no surprise why that system performed miserably.

On November 9, 1989, when the Berlin Wall fell, a 35-year-old East German named Angela Merkel crossed into West Berlin. Today, she is Germany’s Chancellor. Having grown up in former East Germany, Merkel understood the limitations promulgated by that system. Under capitalism, she has witnessed a rapid and significant rise in living standards in former East Germany.

Interestingly, tested by the recent recession, the German government contemplated various Reagan-like economic initiatives to boost growth. In November 2009, addressing parliament for the first time after her re-election, Merkel announced Germany would proceed with tax reductions for both consumers and businesses to ensure the country would emerge swiftly out of recession, the Financial Times reported.

America’s “secret sauce” has made this country great. But it is in danger of becoming diluted.

When I was a junior at Canisius High School in Buffalo, New York, I traveled to Washington, DC to interview my Congressman, Jack Kemp, for a paper on the Kemp-Roth Bill. I remember my first encounter well. He enthusiastically pulled me aside, gave me several books, and explained how lower tax rates generate higher economic growth, and in turn, lead to more tax revenue. This conviction, advanced by economist Arthur Laffer and his famous Laffer Curve, helped shape the economic and tax policy views of many, including President Ronald Reagan.

When he took office in 1981, President Reagan inherited an economy that, up until then, was in the worst recession since the Great Depression. Unemployment and inflation were both running in double digits. In August 1981, he signed the Kemp-Roth Bill, formally known as the Economic Recovery Tax Act of 1981, into law.

The Act slashed tax rates on earned and unearned income, as well as capital gains. The result: from 1983 through 1986 U.S. economic growth rose to an average of nearly 5 percent annually — up from less than 1 percent in real terms from 1978 through 1982. Although a variety of factors may have influenced growth during this period, President Reagan's economic prescriptions had a very positive impact on the United States. But that’s not all.

The American economic system, often referred to as the Margaret Thatcher-Ronald Reagan model, has delivered a remarkably higher quality of life than competing systems for billions of people worldwide. Margaret Thatcher, Prime Minister of the United Kingdom from 1979 to 1990, and Ronald Reagan stressed the efficiency of private enterprise.

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Today, the United States is engaged in a debate about the responsibilities and contributions of private enterprise and government. The conclusion, no doubt, could have a tremendous impact on the country.

What in our past has made America so great?

For one, the framers of the Constitution were brilliant. They understood the importance of transparency, rule of law, separation of church and state, and balance of power. This blend is part of an important American formula that shepherds constant change — some good, some bad — but always allows for self correction.

To borrow a phrase from Lord John Acton, a member of British Parliament in the 1860s, the framers of the U.S. Constitution understood that "absolute power corrupts absolutely." Their experiment, which was founded on a philosophy and not a bloodline, clearly sets the U.S. apart.

When discussing the benefits of capitalism, Michael Novak, an author of more than 25 books, said "No other system so rapidly raises up the living standards of the poor, so thoroughly improves the conditions of life, or generates greater social wealth and distributes it more broadly. In the long competition of the last 100 years, neither socialist nor third-world experiments have performed as well in improving the lot of common people, paid higher wages, and more broadly multiplied liberties and opportunities."

Novak indicated that a free society requires economic liberty. And very importantly, he stressed that checks and balances are to the political order what competition is to capitalism. He also expressed the need to ensure these systems are well maintained.

When recently in China addressing the Academy of Social Sciences, I was asked about various problems affecting the U.S. Congress. I couldn't help recalling a quote by Winston Churchill, who when asked about problems with Democracy, said "it's the worse system except for all the others." I answered the question and acknowledged to my host that China's leadership has made some very good economic decisions for its country, but asked: what if future generations of Chinese leaders are not so smart?

China does not possess the American system of checks and balances that, among other things, prevents any one group from permanently imposing its will on others. As a result, China’s brand of authoritarian capitalism, referred to as “socialism with Chinese characteristics,” likely will undergo severe difficulties in the years ahead. Surprising to many, America’s brand of capitalism also could undergo real challenges.

For generations, the American system has empowered individuals to achieve their dreams and unleash their innovative and creative abilities. This paved the way for tremendous gains in efficiency and productivity, both which lead to higher standards of living.

Foreigners always seemed to have recognized this. Immigrants like my grandparents left their homelands with tremendous hope of securing a better future. They understood the difficulties they would incur, but possessed the necessary courage and resolve to persevere. In turn, America has been the destination of the world’s hungry, as well as the world’s brightest entrepreneurs, engineers and scientists. This strength and determination is reflected in all that is American.

The U.S. free enterprise system, can-do entrepreneurial spirit, capital markets, tolerance, checks and balances, and acceptance of immigrants — factors that make up America’s “secret sauce” — have made the country great. It’s why U.S. innovation is so strong and responsible for tremendous numbers of patents. It’s also the fuel that supports companies like Facebook, Apple, Google and Microsoft.

Moving forward, however, America’s “secret sauce” could become diluted.

A concept fundamental to American economic success is "creative destruction," wherein the new destroys the old even while the old is still valuable. Advanced by Joseph Schumpeter, the concept supports the innovative entry into the market by entrepreneurs and is the force that sustains long-term economic growth, even though the process destroys the value of existing organizations. This concept is not well understood.

Our free market capitalist system constantly produces new and more advanced products, services, technologies and organizations. In the process, jobs are created and destroyed, just as autoworkers displaced buggy makers. If the effects are not thoughtfully grasped, however, the introduction of new legislation and regulations could undermine American “creative destruction” from doing its long-term beneficial job. And poor policies could water down the fundamental strengths of the American economy.

Stated by author and commentator John Steele Gordon, "Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than long-term consequences even when those consequences can be easily foreseen."

Our free enterprise system, not elected officials, is responsible for creating jobs and wealth in the United States. And although our political leaders want the best for our country, their policies often have unintended consequences that could seriously undermine our economic system and its job-creating capacities.

Due to America’s decades-old strengths and character, the United States is unlikely to cease being great. Nevertheless, it is important to continually remind our policymakers why.


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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