LAFFER ASSOCIATES

Supply-Side Investment Research

March 24, 2009
10-yr T-Note: 2.68% DJIA: 7,659.97 NASDAQ: 1,516.52 S&P 500: 806.25 S&P 500 Undervalued: 170.2%

CAPITALISM IN THE TRENCHES, FIGHTING FOR ITS LIFE

By Kenneth B. Petersen, Ph.D

Summary
• Communism, socialism, or “new capitalism” are all vastly inferior systems for organizing economic activity than
capitalism. There is nothing above or beyond capitalism.
• A return to reasonable regulation would cause capitalism and prosperity to reunite. We should not let the “cure”
destroy capitalism.

"The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal
sharing of misery." -- Winston S. Churchill.

“Laissez-faire, c’est fini!” -- Nicolas Sarkozy.

“Some may try to tell us that this is the end of an era. But what they overlook is that in America, every day is a new
beginning. For this is the land that has never become, but is always in the act of becoming.” -- Ronald Reagan.

The economy is in bad shape and some people are starting to believe that capitalism has run its course. French President
Nicolas Sarkozy hosted a symposium called “New World, New Capitalism” in January 2009, where he and former British
Prime Minister Tony Blair together with German Chancellor Angela Merkel, advocated the idea of “social markets” as a
blueprint for a “new capitalism.” Even the highly respected Financial Times last week ran a daily analysis on the future of
capitalism and its potential replacement. One word: Crazy!

Capitalism and all the prosperity that comes with it, rests on a handful of kingdoms: Property rights, low taxes, sound
money, free trade, and reasonable regulation. Except for reasonable regulation, all the other components that make
capitalism so successful are largely well-behaved. We don’t need communism, socialism, or “new capitalism” but simply a
return to reasonable regulation.

For example, putting credit default swaps (CDS) on an exchange, forcing investment banks to get back to the old 12 times
equity rule (leverage), forcing mortgage originators to actually check peoples W-2’s, and splitting investment banks from
commercial banks, would allow us to once again reap the abundant fruits that capitalism is capable of producing.

Table 1
Income Per Capita in Five- Capitalistic Countries, Socialistic Countries, and (former) Communistic Countries
(GDP per capita, purchasing power parity (PPP) dollars, 2005)

Capitalistic Socialistic Communistic

Luxembourg 69,984.26 Denmark 33,543.49 Hungary 16,986.86

Singapore 43,332.96 Sweden 32,705.81 Poland 13,571.35

U.S. 41,929.08 France 30,634.99 Russia 11,832.45

Switzerland 36,566.58 Germany 30,486.12 Belarus 8,562.36

Hong Kong 35,549.52 Italy 28,107.88 Ukraine 5,625.91

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Laffer Associates Capitalism in the Trenches, Fighting for its Life

No other mechanism coordinates economic activity as successfully, and with as much prosperity for everyone, as does
capitalism, period (Table 1). Financial and other market reforms must not risk destroying the ultimate source of prosperity.

China, India, and other former communist countries have experienced tremendous gains in wealth, life expectancy, literacy,
and other measures of prosperity, after they adopted capitalism. Global income increased by about 145% during the last
three decades to a large degree because capitalism was embraced by more and more countries across the world.
Capitalism brings hard work, innovation, and entrepreneurship with it, which allows millions of people to climb out of crushing
poverty.

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