Want to learn how the economy really works?  Don’t go into academia.  Get a job.

I spent six years of school filling my head with fancy theories and complicated mathematics, practiced under assumptions that often don’t work in the real world.  I earned both a bachelor’s and a master’s degree in economics, but where I really learned about the economy was from my job.

For the past decade, I have worked for David Hartman editing The Lone Star Report, a weekly policy newsletter that covers state government.  An engineer by training with an M.B.A. from Harvard, Mr. Hartman has succeeded in a variety of vocations—banking, plastics, trucking.  He has run real businesses and has a knack for numbers like few I have ever encountered.  In many ways, Mr. Hartman is a stereotypical banker—conservative, thrifty.  America used to produce thousands of self-made entrepreneurs like that.

When I first came to work for Mr. Hartman, Austin, Texas, was a boom town.  Dot-coms were multiplying like flies, with many moving here from Silicon Valley because of the lower cost of living.

“This is a bubble,” Mr. Hartman told me in 1999.  “It won’t last.  These dot-coms produce nothing of value.”

Sure enough, the bubble burst, and in the early part of this decade Austin contracted about as fast as it had expanded.  It was the first of many Hartman predictions about the economy that later came true.

Mr. Hartman was talking about living on borrowed time and expressing concern about the long-term state of the U.S. economy back in the late 1990’s, when almost everyone assumed the dollar was invincible and the stock market would rise in perpetuity.  He knew better.  Experience had taught him a number of important lessons that he passed on to me.

The economy grows when people make stuff.  The current crisis was precipitated by financiers who tried to invent value by coming up with all sorts of computerized derivatives that only an investment banker (and not very many of them, apparently) could understand.  But it was all funny money, the product of a series of paper transactions.  With the Federal Reserve moving to expand the money supply, and financial institutions doling out loans with no real collateral, the lack of value led to the subprime mortgage crisis.

Banking provides an invaluable boost to the economy—when practiced honestly with sound underwriting standards.  Lending adds value when it enables the private sector to make goods of value, such as homes, gasoline, and food.

Talk to Mr. Hartman for an hour, and you will probably hear him mention the decline of American manufacturing.  Our manufacturing base helped the United States win two world wars.  But our tax system is penalizing manufacturing and driving it abroad.  According to statistics from the Bureau of Economic Analysis, as noted by Mr. Hartman in a report he delivered recently to a Texas Workforce Commission conference, the manufacturing share of U.S. Gross Domestic Product has declined from about 30 percent in the 1950’s to less than 15 percent today.

That is why Mr. Hartman has devoted a substantial part of his life to promoting public policies that encourage the growth of American manufacturing.

When you tax wealth, you get less of it.  Our tax system has killed the manufacturing base in this country.

The value-added taxes (VATs) adopted by European countries are border-adjustable.  European governments add VATs to imports from America, which levels the playing field for their domestic manufacturers; exports, however, are not taxed.

Effectively, this amounts to a tax subsidy for European-manufactured goods and a tax penalty on American manufacturing.  Europe has de facto tariffs as a result of VATs; since World War II, however, the United States has dramatically reduced her own tariffs.

Meanwhile, while Ireland and, to some extent, the rest of Europe have prospered, largely by cutting taxes on businesses and encouraging business to grow, the United States has some of the highest corporate taxation in the world.  Here, both corporate profits and capital gains and dividends are taxed.  This double taxation has provided U.S. corporations with an incentive to move offshore.

The net effect is that the U.S. market is very profitable for foreign companies, but not for U.S. manufacturers.

Mr. Hartman has proposed abolishing several U.S. business taxes and replacing them with a Business Transfer Tax that is border adjusted.  Eliminating double-taxation of saving and investment would level the playing field for U.S. manufacturing.

Trade deficits matter.  The decline of U.S. manufacturing is both a national-security problem and an economic problem.  The former is perhaps easier to see, since most economists insist that trade deficits don’t matter.  But as Mr. Hartman said in a June 2005 presentation to the American Enterprise Institute,

The relentless growth of the U.S. trade deficit has not provided evident beneficial investment of the resulting “foreign capital surplus.”  Virtually all foreign investment has been in existing rather than new productive assets, principally in support of their exports to the U.S.  The U.S. trade deficit has been reflected in excessive consumption at the expense of U.S. personal saving for investment.

 

America has forgotten the lessons of the Great Depression.  I remember being in a meeting with Mr. Hartman in the late 1990’s in which he was absolutely outraged that Congress was repealing the Depression-era Glass-Steagall Act, which prohibited banks from selling insurance or investment products.  Libertarian theorists, the business community, and the GOP all favored Glass-Steagall’s repeal, but Mr. Hartman has been proved right by the current economic crisis.

When the banking system fails, everything else fails with it.  In the 1920’s, financial institutions took inappropriate risks, and the entire U.S. economy suffered.  By separating banking from the rest of the financial markets, Glass-Steagall protected the economy.  Now more than ever before, this sort of legislation is essential to the financial health of the nation.  With the advent of computers and instant electronic transactions, a myriad of financial instruments threaten the security of the U.S. economy, unless they are kept in check by appropriate regulation.

When government gets too big, it chokes out the private sector, but the Depression showed that there is a legitimate role for the government to play in keeping the financial system honest and transparent.

A strong dollar is good for the U.S. economy.  One of the ways the Federal Reserve has promoted liquidity is by weakening the U.S. dollar.  In reviewing Barack Obama’s economic plan in these pages (“The Revelations of the Obama Plan,” Views, October 2008), Mr. Hartman wrote:

Devaluing the dollar has not worked, because it inflates commodities and other costs and offers U.S. real estate, factories, and securities for sale at bargain-basement prices.  Devaluation will reduce Americans to serfs under foreign landlords.  The very process of devaluing the dollar through low interest rates that do not even offset inflation and devaluation results in inadequate savings to restore and update the manufacturing sector, as well as to supplement retirement income for the prudent.

 

Inheritance taxes are a disaster.  Why is America ruled by publicly traded corporations instead of by individual entrepreneurs?  A corporation is shielded from the effects of inheritance taxes.  But the inheritance tax makes it very difficult for successful entrepreneurs to pass along the full benefits of their success to their heirs.

Large, multinational, publicly traded corporations have little accountability to the communities in which they are headquartered—or to anyone else.  Corporate America is loyal to shareholders, not neighbors.  Short-term profits are pursued no matter the cost to the community.

Have Wall Street executives been held accountable for their misdeeds?  No.  Washington is rewarding them with billions of dollars in taxpayer money.

Individual American entrepreneurs like Mr. Hartman are an important part of real American communities, and America was built on their ingenuity.  Now they are becoming an endangered species.

Mr. Hartman’s philosophy is simple, but it is hard to enact politically.  It wrests power from the politicians and returns it to the people who made America the envy of the world.  When it comes to guidance on how to fix our flagging economy, it would pay for Americans to turn to self-made men who know something about real value, instead of to the theorists and politicians who made the mess to begin with.